Edited version of your private ruling

Authorisation Number: 1012501666046

Ruling

Subject: GST and supply of a going concern

Question

Will Entity A and Entity B make a GST-free supply of a going concern when they sell the XYZ Residential Aged Care Facility?

Advice/Answer

No. When the XYZ Residential Aged Care Facility is sold in accordance with the provisions of the Land Sale Contract, Agreement to Transfer and Shared Service Agreement, Entity A and Entity B will not be making the GST-free supply of a going concern.

Relevant facts and circumstances

You, Entity A and entity B are joint applicants for this private ruling. Entity A is also known as Department A. For ease of reference, the names Entity A and Department A are used interchangeably in this ruling.

For GST purposes, Entity A is the GST Group representative member of a GST group. The GST group members include Entity B. Entity A is registered for GST from 1 July 2000.

The State, through Entity A, is the body approved by Department of Health and Ageing (DoHA) to operate the federally funded residential aged care services at the specified location. The facility is located on land including buildings and fixtures owned by the State. These facilities are used by Entity B to provide residential aged care services to the specified community. Entity B is a recently established statutory authority and it represents the State.

Entity B is proposing to sell the operation of the XYZ Residential Aged Care Facility. The facility is an N number bed State Government aged care facility, providing high care services to the older person.

The facility is located at a specified address and is within the complex of Entity C (although it is going through the process to create a separate indefeasible title - subdivision to create a separate lot/plan).

Included in the sale is a parcel of land (Additional Land) adjacent to the site of the Facility that is identified on a separate lot/plan to the aged care facility.

Expressions of Interest have been received from interested parties and a number of parties have been invited to participate in a Final Bid Offer.

Entity B currently holds a licence to operate a nursing home with the Commonwealth DoHA. This licence is to be transferred to the new owner upon sale.

The Facility is proposed to be sold as a going concern with all Residents, licences, staff and assets transferred to the new provider as follows:

Land and Buildings

The Land and Buildings of the XYZ Residential Aged Care Facility are held in the name of the State (represented by Entity A). They will be transferred directly from the State to the new owner. The Land sale Contract specifies the particulars of the land sold in relation to the site of the Facility and the Additional Land.

(All other assets are in the name of Entity B).

Staff

Although all prospective new providers have shown interest in retaining some staff, the ongoing cost may determine the numbers. There will be a transition period after the finalisation of the sale and transfer of beds where the new provider will decide who and numbers of staff they will retain.

The terms of the Transfer Deed (Agreement to Transfer) provide that there is no obligation on the new owner to make offers to employ remaining staff. Entity B will play no part in the employment process by the new Provider.

As the preferred position of Entity B is that staff will be offered redundancies, there is no guarantee that all staff will be transferred upon sale of the facility enterprise.

Assets

As stated earlier, all assets (other than the land and buildings) are in the name of Entity B.

Under the Transfer deed, Facility Assets will be supplied. The term 'Facility Assets' refer to the Allocated Places and all of the assets owned and used by Entity B in the operation of the Facility including:

(a) the goodwill of the Business, including the exclusive right to operate the facility in succession to Entity B;

(b) the Plant and Equipment;

(c) the Statutory Licences;

(d) the Resident Agreements;

(e) the Stock; and

(f) the Records,

but does not include cash, debtors and the Excluded Assets.

Schedule 1 to the Transfer Deed provides that the Excluded Assets are:

1. The Facility Contracts

2. Any Receivables

3. Any items owned by the Residents either individually or collectively.

4. The following items: [to be inserted] [Note: Bidders should refer to items listed as "Excluded Assets" in Additional Information in Request for Binding Bid for indication of items]

Annexure A of the Request for Binding Bid lists Excluded Assets as:

ICT Equipment

Voice Infrastructure and End User Devices

Voice Carriage

In-dial Number Range

PBX

DECT Base Stations

Digital handsets

Analogue handsets/faxes

DECT handsets

Conference phones

Mobile Phones

Paging Infrastructure

Current Paging Infrastructure

Interfaces to Paging

Short Range Pagers

Workstations based upon location:

Desktop PCs

Laptops

Printer based upon location:

Laser Printers

Video Conferencing:

1 Room VC System

Services

Finance and Human Resources services are provided on a centralised basis to Entity B. On this basis these services will not be transferred on sale and the new owner will need to make their own arrangements.

In addition, Catering services are provided out of Entity B's core business establishment with Laundry Services provided by a separate business unit. These services will not be transferring or be provided under an arrangement. The new owner must enter into their own arrangements for the provision of the services or products currently provided.

There will be a Shared Service Agreement made but this refers only to three main services - Chilled Water, Emergency Power and Fire Fighting Water main. These services have direct links with the infrastructure of entity B's core business establishment and cannot be cut off without complications.

Contract for services

Part of the information provided to the bidders will be details of all existing contracts in place for things such as Hairdressing, Podiatry, Therapy Services and preventive maintenance contracts. The new owner may continue with these contracts or terminate them and seek new contracts; however there will be no formal transfer of existing contracts.

You have provided the following three contracts/agreements in their draft form:

(1) Contract for Commercial Land and Buildings (the Land Sale Contract) to be entered into between

The State (represented by Entity A) and

[name of the purchaser/s].

(2) The XYZ Aged Care Facility Transfer Deed (Transfer Deed/Agreement to Transfer) to be entered into between:

The State through Entity A and Entity B together (Transferor) and

[name of Transferee]

[name of the Guarantor]

(3) Shared Services Agreement - Entity C and XYZ Nursing Home to be entered into between

Entity B and

[name of purchaser]

You have also provided a copy of the Request for Binding Bid document for bidders to bid for the operation of the XYZ Residential Aged Care Facility.

The objective of Entity B is to enter into contractual arrangements with a non government provider who can deliver a quality service in the local community, so that Entity B can focus on its core business while removing or reducing the costs and operational burden on Entity B in running the XYZ Residential Aged Care Facility.

Entity B has shortlisted the Respondent following the Expression of Interest process. Under the Request for Binding Bid, the Respondent is invited to submit a Binding Bid to Entity B in respect of the XYZ Residential Aged Care Facility. You have also provided a copy of the Request for Binding Bid document.

The Binding Bid Response Form states that the Respondent may choose to bid for the following (with and without the Additional land, or a separate bid to purchase the Additional Land alone), with the price set out as follows:

The Transfer Deed includes the following clauses:

Clause on Definitions

Additional Land: the specified lot.

Allocated Places: The specified number of High Care Places ... currently at the Facility which have been allocated by DoHA to the Transferor under the Health Care Act.

Business: The business carried on by the Transferor of operating the Facility, including the Residential Care Service.

Excluded Assets: the assets listed in Schedule 1 (to the Transfer Deed).

Facility: The XYZ residential aged care facility located at the specified address including the Residential Care Service provided at the Facility.

Facility Assets: The Allocated Places and all assets owned by Entity B and used by Entity B in the operation of the Facility including:

(a) the goodwill of the Business, including the exclusive right to operate the Facility in succession to Entity B;

(b) the Plant and Equipment;

(c) the Statutory Licences;

(d) the Resident Agreements;

(e) the Stock; and

(f) the Records,

but does not include cash, debtors and the Excluded Assets.

Facility Contracts: Those agreements, arrangements, understandings and orders entered into, made or accepted by or on behalf of Entity B in the operation of the Facility, other than Resident Agreements.

High Care Place: An Allocated Place that has been granted by DoHA for the purpose of providing High Level Residential care to a Resident that has been approved for that level of residential Care or as at the date of this Deed is otherwise used to provide High Level Residential care.

Land Sale Contract: The contract for the sale of the Property in the form attached to this Deed as annexure A and entered into on the date of this Deed.

Property: The specified Land, the Additional Land and any inclusions set out in the Land Sale Contract.

Records: All original and copy records, documents, files, reports, accounts, plans, correspondence, letters and other material regardless of their form or medium relating to the Residents or the day to day operation of the Facility as are required to be kept under the Aged Care Act but does not include any original or copy material required to be retained by the Transferor in order to comply with any obligation at law.

Statutory Licences: All licences, consents, rights, permits and certificates required to operate the Facility issued by any Governmental Agency insofar as they are able to be transferred to the Transferee and only to the extent they are exclusive to the Facility, other than the Allocated Places.

The Specified land: the specified lot identification number.

Clause on Conditions

Completion must not occur until all of the following conditions are either fulfilled or waived in accordance with this clause:

(a) DoHA Approvals: DoHA having approved the DoHA Transfer Application whether unconditionally or on conditions which are satisfactory to the Transferor and the transferee..., and

(b) Approved Provider: If not already so, then the Transferee becoming an Approved Provider,

...

Clause on Sale and purchase of the Assets

On Completion, the relevant Transferor sells to the Transferee, and the Transferee purchases from the relevant Transferor, the Business, including:

(a) full legal title and the entire beneficial ownership of the Facility Assets free from encumbrances; and

(b) the Property on the terms set out in the Land Sale Contract.

Clause on Acknowledgment regarding Facility Contracts

The Transferee acknowledges that:

(4) the facility Contracts will not be sold or otherwise assigned or novated to the Transferee by the relevant Transferor either under this Deed or any other document; and

(5) from Completion, the Transferee will not be entitled to the benefit of the Facility Contracts and must enter into its own arrangements for the provision of the services or products currently provided to the Transferor under the Facility Contracts.

Clause on Interdependency with Land Sale Contract

(a) This Deed and the Land Sale Contract are interdependent and must be completed at the same time.

...

Clause on Purchase Price

The Transferee must pay the Purchase Price to the Transferor as follows:

(a) the deposit on the date of this deed ...

(b) the balance of the Purchase Price on Completion ...

Clause on Operation of the Facility

Subject to the agreement of the Transferee (acting reasonably) otherwise, until Completion, the Transferor must, subject to the covenants and restrictions contained in this Deed, operate the Facility in the ordinary course as if this deed has not been entered into.

Clause on Transfer of Allocated Places includes:

(a) The parties acknowledge that Entity A has lodged a completed DoHA Transfer application with DoHA and the Transferee acknowledges receipt of a copy of the DoHA Transfer Application.

...

The Land Sale Contract includes:

The land to be supplied is:

The specified lot identification number and address for the facility land site and the Additional Land

The above is further clarified by the below clause which states:

The parties acknowledge and agree that:

(a) the supply of the Land by the Vendor under this Contract is the GST-free supply of a going concern;

(b) the supply of the Additional Land by the Vendor under this Contract is a taxable supply; and

(c) ...

GST Table Item at Items Schedule is shown as deleted.

The Shared Services Agreement includes the following definitions:

Commencement Date: [insert the date of completion of the sale of the XYZ Site]

Term: a specified number of years commencing on the Commencement Date or any longer period agreed by the parties.

The Facility Site: The XYZ Nursing Home, comprising of the specified lot number

Request for Binding Bid - Additional information of the Request for Binding Bid, clause 1.2 states:

It is anticipated that the transaction will not meet the tax requirements to be considered the sale of a going concern...

Annexure B to the Request for Binding Bid is the Residential Care Agreement. Schedule 2 -Your Care & Services includes:

General laundry -heavy laundry facilities and services, and personal laundry services, including laundering of clothing that can be machine washed.

...

Meals and Refreshments

o Of adequate variety, quality and quantity are provided to you each day, ...This generally consists of three (3) meals each day plus morning tea, afternoon tea and supper

o Catering for special dietary requirements, having regard to your medical need, religion or cultural observance

...

rehabilitation support involves individual therapy programs designed by health professionals aimed at maintaining or restoring your ability to perform daily tasks yourself, or assisting your access to these programs.

therapy services such as recreational, speech therapy, podiatry, occupational and physiotherapy services

Relevant legislative provisions

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

Reasons for decision

Note: In this ruling, unless otherwise stated,

all legislative references are to the A New tax System (Goods and services) Tax Act 1999 (GST Act)

all reference materials referred to are available on the Australian Taxation Office website www.ato.gov.au

Section 38-325 states:

(1) The *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; and

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

(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).

The terms marked with an asterisk are defined in section 195-1.

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) explains what is a 'supply of a going concern' for GST purposes. It also explains when the 'supply of a going concern' is GST-free.

Identified enterprise

Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'enterprise'. Accordingly, we need to identify the enterprise that is being supplied in this case.

The definition clause of the Transfer Deed identifies the business to be supplied as that of the operation of the XYZ residential aged care facility, including the Residential Care Service.

Supply under an arrangement

Paragraph 19 of GSTR 2002/5 explains that 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').

In this case, the Land Sale Contract, Transfer Deed and Shared Services Agreement will be entered into and completed at the same time. The Land Sale Contract and the Transfer Deed are interdependent as provided under the Transfer Deed. Although the Shared Services Agreement was not specified as interdependent with the other contracts, its commencement date is linked to the Completion Date of the Place Land. Accordingly, we consider these 3 contracts comprise a single arrangement relating to the same enterprise of the operation of the XYZ residential aged care facility. Therefore, we consider the term 'supply under an arrangement' in subsection 38-325(2) will be satisfied.

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

Paragraph 38-325(2)(a) requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

The term 'thing' is defined in section 195-1 as anything that can be supplied or imported.

Paragraph 72 of GSTR 2002/5 explains that the term 'necessary' incorporates every attribute of an enterprise that is 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 73 of GSTR 2002/5 further explains that 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. 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.

As determined earlier, the identified enterprise being transferred is the operation of the XYZ Residential Aged Care Facility. In considering whether all of the things that are necessary for the continued operation of the enterprise will be supplied to the recipients we have taken into account the following:

Premises

Under the Land Sale contract the business premises will be supplied directly by the State (represented by Entity A) to the purchaser.

Note: Another lot of land known as the Additional Land (vacant land) adjacent to the business premises will be sold under the same Land Sale Contract together with the business premises. This lot is not the subject of this ruling and will not be considered further.

Assets

Under the Transfer Deed, Facility Assets will be supplied. The term 'Facility Assets' refers to the Allocated Places and all of the assets owned and used by Entity B in the operation of the Facility including:

(g) the goodwill of the Business, including the exclusive right to operate the Facility in succession to Entity B;

(h) the Plant and Equipment;

(i) the Statutory Licences;

(j) the Resident Agreements;

(k) the Stock; and

(l) the Records,

but does not include cash, debtors and the Excluded Assets.

Licence

Allocated Places refer to the N number High Care Places currently at the Facility which have been allocated by DoHA to the Transferor under the Aged Care Act 1997.

Paragraphs 103 and 105 of GSTR 2002/5 state:

103. The supply of all of the things that are necessary for the continued operation of an enterprise that has or is required to have, as part of its business activities, statutory licences, permits, quotas or similar things,.... must include those things as part of the supply in order for there to be a 'supply of a going concern'.

105. Where a supplier is permitted by the relevant statutory regime to transfer the licence, permit or other statutory authorisation, it must transfer it. Where the supplier may only transfer the thing with permission from a relevant entity, it may attempt to gain that permission. As discussed in paragraph 50 above, where the supplier, having made all reasonable attempts to transfer the thing, has no option but to surrender it in favour of the recipient, the surrender and reissue will be taken to be a supply of the licence, permit or other statutory authorisation by the supplier for the purposes of section 38-325.

As stated in the Transfer Deed, Statutory Licences will be transferred. The Statutory Licences in this instance refer to all licences, consents, rights, permits and certificates required to operate the Facility issued by any Governmental Agency insofar as they are able to be transferred to the Transferee and only to the extent they are exclusive to the Facility, other than the Allocated Places.

Although the licence for the N number High Care Places (the Allocated Places) will not be transferred as indicated above, there are provisions in the Transfer Deed that the Transferor will apply to DoHA for approval to have the licence transferred to the Transferee, with the condition that Completion must not occur until this is either fulfilled or waived.

We consider these provisions are in accordance with paragraph 105 of GSTR 2002/5 and the licence for the N number Allocated Places is taken to have been supplied for GST purposes.

Staff

Paragraphs 122 to 130 of GSTR 2002/5 set out guidelines in relation to transfer of staff. At paragraph 125 is stated 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. Although key employees are not 'things' capable of being supplied, the particular and unique skills and knowledge of such a key employee is the thing which is necessary for the continued operation of the enterprise. The supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge utilised by the key employee in the enterprise.

The definition of Employee in the Transfer Deed includes a person employed by Entity A and engaged in the XYZ Residential Aged Care Facility at the date of the Transfer Deed, and who remains employed at the Completion Date.

The preferred position of Entity B is that staff will be offered redundancies, which does not guarantee that all staff will be transferred upon sale of the facility enterprise. All prospective new providers have shown interest in retaining some staff but the ongoing cost may determine the numbers. Entity B will play no part in the employment process by the new Provider.

You consider the new owners may need to seek additional staff to supplement those not transferring and that the unknown is whether suitably qualified staff, predominantly nursing or allied health staff, will be available to be employed by the new owners.

You have also stated that there will be a transition period after the finalisation of the sale and transfer of beds where the new provider will decide who, and numbers of staff, they will retain.

As your employees will remain employed at the Completion Date and there being a transition period after the finalisation of the sale and transfer of beds where the new provider will decide who and numbers of staff they will retain, we consider that skills and knowledge of staff/personnel, should they be necessary, would have been supplied by you on the day of supply and available to the recipient to continue the operation of the aged care facility.

Services

Finance and Human Resources services are provided on a centralised basis to the entire establishment of Entity B. On this basis, these services will not be transferred on sale and the new owner will need to make their own arrangements.

We consider that these services are necessary for the continued operation of the XYZ Residential Aged Care Facility.

Catering services are provided out of Entity B's establishment with Laundry Services provided by a separate business unit. These services will not be transferring or be provided under an arrangement. The new owner must enter into their own arrangements for the provision of the services or products currently provided.

We consider that these services are necessary for the continued operation of the XYZ Residential Aged Care Facility.

Shared Service -there will be a Shared Service Agreement made. This refers only to three main services - Chilled Water, Emergency Power and Fire Fighting Water Main. These services have direct links with the infrastructure of Entity C and cannot be cut off without complications.

Paragraph 100 of GSTR 2002/5 explains that the supply of things necessary for the continued operation of an enterprise may be achieved by the parties entering into a contract which was not in existence prior to the day of supply.

We consider that by entering into the Shared Service Agreement to commence on the day of supply, the Chilled Water, Emergency Power and Fire Fighting Water Main will be supplied.

Contract services - part of the information provided to the bidders will be details of all existing contracts in place for things such as Hairdressing, Podiatry, Therapy Services and preventive maintenance contracts. The new owner may continue with these contracts or terminate them and seek new contracts; however there will be no formal transfer of existing contracts.

We consider that these services are necessary for the continued operation of the XYZ Residential Aged Care Facility.

We consider that all of the above services are necessary for the continued operation of the XYZ Residential Aged care Facility. With the exception of the Shared Services, these services will not be supplied. Therefore, the requirements of paragraph 38-325(2)(a) will not be satisfied.

Supplier carries on the enterprise until the day of the supply

Paragraph 38-325(2)(b) requires that 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).

Paragraph 141 of GSTR 2002/5 states:

The supply of everything necessary for the continued operation of an enterprise will only be a '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.

In this instance, the specified clause of the Transfer deed provides:

Subject to the agreement of the transferee (acting reasonably) otherwise, until Completion, the Transferor must, subject to the covenants and restrictions contained in this Deed, operate the facility in the ordinary course as if this Deed had not been entered into.

Where the State through Entity A and entity B (Transferor) carries on the XYZ Residential Aged Care Facility enterprise up until the settlement/completion date, we will consider paragraph 38-325(2)(b) to be satisfied. However, the specified of the Transfer Deed indicates that under certain circumstances the facility may not be operated until the day of the supply, at the time of this ruling, we are unable to determine definitively that paragraph 38-325(2)(b) will be satisfied.

The term 'supply of a going concern' is a statutory term which is defined in subsection 38-325(2). For there to be a 'supply of a going concern' both paragraphs 38-325(2)(a) and (b) must be satisfied. We have determined that paragraph 38-325(2)(a) will not be satisfied. Further, we are unable to determine definitively that paragraph 38-325(2)(b) will be satisfied. As subsection 38-325(2) will not be satisfied, there will not be a supply of a going concern. Therefore, it is not necessary to consider subsection 38-325(1).