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Ruling

Subject: GST and supply of a going concern

Question 1

Is the supply of the Business and the Assets to be made by A to F 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.

Question 2

Is the supply of the Business and the Assets to be made by B to G a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

Yes.

Question 3

Is the supply of the Business and the Assets to be made by C to G a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

Yes.

Question 4

Is the supply of the Business and the Assets to be made by D to G a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

Yes.

Question 5

Is the supply of the Business and the Assets to be made by E to G a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

Yes, provided that the supply is ultimately made in the manner of the other supplies and not by way of a share purchase arrangement.

Question 6

Is F entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by A?

Answer

No.

Question 7

Is G entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by B?

Answer

No.

Question 8

Is G entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by C?

Answer

No.

Question 9

Is G entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by D?

Answer

No.

Question 10

Is G entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by E?

Answer

No.

Relevant facts and circumstances

A, B, C, D and E (Sale Parties) are parties to contracts associated to operate a business and associated assets. A buyer consortium is bidding for the acquisition of the concession to operate the business and associated assets. If its bid is successful, the buyer consortium will make the acquisition through F and G.

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 11-20

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

Reasons for decision

Summary

The supply of the Business and the Assets to be made by A to F is 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.)

The contract and the novation the Lease as well as the novation of the subsequent subleasing arrangement under which B has been granted continuous occupancy over the land provide for the supply of the leasing enterprise and all that this entails (see below).

In our view, the contract and novations constitute an arrangement that satisfies 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.

In essence A operates a leasing business in relation to the land. A has granted B continuous occupancy over the land in return for. A's enterprise is continuous and uninterrupted. This is 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 A supplies to F the leasing enterprise consisting of the right it was granted as primary lessee and the novation of rights. A in turn granted to B access to the land in return for rent. A will also supply its Business and Assets.

It is our view that all the things necessary for the continued operation of the leasing enterprise are 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 A has done everything to satisfy its obligations under the contract and F has assumed effective control and possession of the enterprise.

Given the passive nature of A's enterprise it is our view that A carries on this enterprise until the day of supply to F, that is the day of completion when all novations and assignments are completed under the contract.

Subsection 38-325(1)

Supply for consideration

Paragraph 38-325(1)(a) requires that the supply is made for consideration.

The consideration for the supply of the leasing enterprise is not yet finalised. We understand that consideration may be 'bundled' into a single purchase price. In any event, where the payment of an amount is made, as per section 9-15 of the GST Act, 'in connection with a supply', the payment is consideration for GST purposes. In the circumstances you outline we consider that the supply made by A is 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 F and G represent and warrant that they will be registered for GST at completion (clause 21.8(b)), we consider that this requirement is 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).

The contract sets out the conditions that must be met for the sale of the leasing enterprise to be affected. Clause 21.8 of the contract sets out the requirements related to the GST Act.

We consider that A and F agree in writing that the supply of the leasing enterprise is the supply of a going concern.

Taking all the above facts into consideration, we agree that A's supply to F meets the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

Question 2

Summary

The supply of the Business and the Assets to be made by B to G is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Initially, the supply by B to G meets the requirements of section 9-5 of the GST Act. B is registered for GST and will receive consideration for the supply in the same manner that A receives consideration for its supply. As B's supply is 'done' in Australia, the supply is connected with Australia.

Supply under an arrangement

As with A's supply to F, in our view, the contract, novations and assignments constitute an arrangement between B and G that satisfies the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

In this case B supplies to G:

· rights to operate the business;

· the right to access the land;

· by way of novation, the agreement with E for the provision of services;

· also by way of novation, the agreement with C for the provision of management and administrative services;

· the interest in agreements with E and C for the provision of a licence to utilise premises from which both E and C operate

C will also novate its agreements with each of the other members of its group for the provision of management services. C will also supply its Business and Assets.

It is our view that all the things necessary for the continued operation of the C's enterprise are supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Given the passive nature of C's enterprise it is our view that A carries on this enterprise until the day of supply to G, that is the day of completion when all novations and assignments are completed under the contract.

Recipient registered for GST

As noted above G represents and warrants that it will be registered for GST at completion (clause 21.8(b)), we consider that this requirement is met.

Agreed in writing

As noted above, all parties to the contract agree in writing that the supply and acquisition of the relevant components of the transaction are the supply of a going concern [clause 21.8(a)].

Taking all the above facts into consideration, we agree that B's supply to G meets the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

Question 3

Summary

The supply of the Business and the Assets to be made by C to G is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Initially, the supply by C to G satisfies section 9-5 of the GST Act. C is registered for GST and will receive consideration for the supply in the same manner as the other Sale Parties. As C supply is 'done' in Australia, the supply is connected with Australia.

Supply under an arrangement

In our view, the contract, novations and assignments constitute an arrangement between C and G that satisfies the requirements of subsection
38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

C's enterprise consists of providing services to the other Sale Parties. Consequently C supplies to G, by way of novation, its agreements with each of the other Sale Parties for the provision of management services. C will also supply by way of novation, its right to occupy its premises. C will also supply its Business and Assets.

Importantly C, through the contract, ensures that provision is made for relevant employees to be offered employment on the same terms with G. The Commissioner's formal view on the supply of going concerns, GSTR 2002/5 states at paragraphs 122 - 125;

122. The services of employees are necessary for the operation of many enterprises. Employees are not 'things' as defined in section 195-1 and therefore are not of themselves 'things that are necessary for the continued operation of an enterprise'. As a matter of law, employment contracts are personal contracts and are incapable of assignment.15 The supply of the services of existing employees of an enterprise is not a thing necessary for the continued operation of the enterprise.16

123. However, continuity of employment of the existing workforce is not an entirely irrelevant consideration in determining whether there is a 'supply of a going concern'. The fact that the employment of existing employees has been terminated prior to the day of supply is a relevant consideration, but not necessarily a decisive one, in determining whether the enterprise in question has continued to operate until the day of supply.

124. Further, the 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. However, as the recipient of a 'supply of a going concern' may choose not to carry on the enterprise after the day of supply, a recipient need not take on the existing workforce in order to establish that the necessary operating structure and process has been acquired. Whether the operating structure and process has been supplied in any given case is always a question of fact and degree to be determined in the light of all relevant circumstances.17

125. 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.

Generally, staff who provide administrative services are not considered to be 'unique and integral' to the continued operation of the enterprise. In any event C, in an open tender environment, is considered to have taken reasonable steps to facilitate the transfer of C's skill and knowledge.

It is our view that all the things necessary for the continued operation of the C's services enterprise are supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Given that C is required to supply services to at least two other entities (A and B) that are carrying on enterprises until the day of supply, it follows that C must also be carrying on its enterprise until the day of supply to G, i.e. that is the day of completion as per the contract.

Recipient registered for GST

As noted above G represents and warrants that it will be registered for GST at completion (clause 21.8(b)), we consider that this requirement is met.

Agreed in writing

As noted above, all parties to the contract agree in writing that the supply and acquisition of the relevant components of the transaction are the supply of a going concern [clause 21.8(a)].

Taking all the above facts into consideration, we agree that C's supply to G meets the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

Question 4

Summary

The supply of the Business and the Assets to be made by D to G is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Initially, the supply by D to G satisfies section 9-5 of the GST Act. D is registered for GST and will receive consideration for the supply in the same manner as the other Sale Parties. As D's supply is 'done' in Australia, the supply is connected with Australia.

Supply under an arrangement

In our view, the contract, novations and assignments constitute an arrangement between D and G that satisfies the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

D's enterprise consists of being the holder of residual rights and obligations that arise from various existing contractual arrangements. It is understood that the 'active' phase of D's enterprise is finished. D's current activities are passive and the company would normally be wound up when its rights are exhausted and it has no more obligations.

While passive, these activities fit within the statutory definition of 'carrying on' an enterprise, which includes 'doing anything in the course of the … termination of the enterprise'. This view is supported by the Commissioner's view as espoused in paragraph 140 of MT 2006/1:

Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

It is our view that all the things necessary for the continued operation of the D's enterprise are supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Given that D is required to hold rights and obligations until exhaustion, it follows that D must also be carrying on its enterprise until the day of supply to G, i.e. that is the day of completion as per the contract.

Recipient registered for GST

As noted above G represents and warrants that it will be registered for GST at completion (clause 21.8(b)), we consider that this requirement is met.

Agreed in writing

As noted above, all parties to the contract agree in writing that the supply and acquisition of the relevant components of the transaction are the supply of a going concern [clause 21.8(a)].

Taking all the above facts into consideration, we agree that D's supply to G meets the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

Question 5

Summary

The supply of the Business and the Assets to be made by E to G is a GST-free supply of a going concern under section 38-325 of the GST Act if it is made in the manner of the other Sale Parties' supplies to F and G.

Detailed reasoning

Initially, the supply by E to G satisfies section 9-5 of the GST Act. E is registered for GST and will receive consideration for the supply in the same manner that the other Sale Parties. As E's supply is 'done' in Australia, the supply is connected with Australia.

Supply under an arrangement

In our view, the contract, novations and assignments constitute an arrangement between E and G that satisfies the requirements of subsection 38-325(2).

Supplier supplies all things necessary for the continued operation of an enterprise

E's enterprise consists of the provision of services. Consequently Es supply to G, by way of novation, will be its agreement with B for the provision of services. E will also supply by way of novation, its right to occupy the premises. E will also supply its Business and Assets.

As with C, D, through the contract, ensures that provision is made for relevant employees to be offered employment on the same terms with G.

It is our view that all the things necessary for the continued operation of E's enterprise are supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Given that E provides services for the business, it follows that it must be carrying on its enterprise until the day of supply to G, i.e. the day of completion as per the contract.

Recipient registered for GST

As noted above G represents and warrants that it will be registered for GST at completion (clause 21.8(b)), we consider that this requirement is met.

Agreed in writing

As noted above, all parties to the contract agree in writing that the supply and acquisition of the relevant components of the transaction are the supply of a going concern [clause 21.8(a)].

Taking all the above facts into consideration, we agree that E's supply to F meets the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.

Question 6

Summary

F is not entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by A.

Detailed reasoning

Under section 11-20 of the GST Act, you are entitled to claim input tax credits for any creditable acquisitions that you make. Section 11-5 of the GST Act states that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

As A's supply to F is the GST-free supply of a going concern, the requirement in paragraph (b) above is not met. As such F is not entitled to claim input tax credits.

Question 7

As B's supply to G is the GST-free supply of a going concern G is not entitled to claim input tax credits.

Question 8

As C's supply to G is the GST-free supply of a going concern G is not entitled to claim input tax credits.

Question 9

As D's supply to G is the GST-free supply of a going concern G is not entitled to claim input tax credits.

Question 10

G is not entitled to claim input tax credits under section 11-20 of the GST Act in respect of the supply made to it by E as the acquisition is not, if the supply is made in the manner of the other Sale Parties' supplies to F and G, a creditable acquisition.

While not canvassed in this ruling, if the acquisition is made under a share purchase arrangement, it is likely that it will be the acquisition of an input taxed supply. If the acquisition is not a creditable acquisition, therefore G is not entitled to claim input tax credits.