Edited version of your private ruling

Authorisation Number: 1012593941674

Ruling

Subject: GST and the supply of a going concern

Question

Were the supplies under the 'Sale and Purchase of Land Contract' and the 'Sale and Purchase Agreement' a supply of a GST-free going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999. (GST Act)?

Answer

No

Relevant facts and circumstances

A bank appointed Receivers and Managers to Entity A (the Incapacitated Entity (IE)) (the Vendor) pursuant to an Equitable Mortgage.

In this ruling the following entities will be known as:

The enterprise was located in Australia.

The Vendor's representative provided the following information in regards to the enterprise operated on the Property.

1 The Vendor's operations prior to the settlement of the sale transaction consisted of the making of wine from grapes:

(i) grown on the Vendor's own property; and

(ii) purchased from third party growers under contract.

Grape processing during the times of vintage, wine storage and wine treatment on behalf of third parties (under contractual arrangements) also provided the Vendor with further revenue generation.

1 Selling its own wine under a number of Labels both:

(i) direct to customers

(ii) via distribution agreements

(iii) through the Vendor's cellar door facility located on the same property as the winery and vineyard. The cellar door facility included a functioning kitchen and restaurant for casual dining, and was used as an area to host functions, including weddings and

(iv) bulk wine sales periodically to supplement income.

Following settlement of the sale transaction, the Purchaser continued to undertake the same business operations that the Vendor undertook prior to settlement. The only differences between the Vendor's operations immediately prior to settlement and the Purchaser's operations following settlement are:

1. The distribution arrangements as set out below

2. The purchaser, whilst being provided by the Vendor as part of the sale with all assets necessary to continue to host weddings at the cellar door, has since decided not to continue with the provision of these services.

Distribution Agreements

"None of the distribution agreements to which the Vendor is a party were assigned to the Purchaser. We are instructed that the reasons for this are:

a) The transfer of the external distribution agreements to the Purchaser was not something that was necessary for the continued operation of the business, and

b) the Purchaser had in place its own distribution arrangements in Australia which could be immediately applied to the distribution of the business' wine.

Post settlement the Purchaser has preferred to use its own distribution arrangements. In this regard, we note that the Purchaser is part of a substantive wine producing and distribution group.

On ddmmyyyy, the Vendor entered into contracts to sell the assets and business of the IE to the Purchaser. The contracts were:

• Contract for Sale and Purchase of land (Land Contract), and

• Sale and Purchase Agreement (Business Contract)

These contracts were supplied.

Settlement occurred on ddmmyyyy. Subsequently, an amendment deed was created on ddmmyyyy, for the sale of the business. The application to transfer the liquor license was determined shortly after the settlement.

The liquor license was issued to the Purchaser, at which time they were entitled to sell liquor from the Property.

Land Contract

The Land Contract was dated ddmmyyyy and was made up of three parts:

• Contract for the Sale and Purchase of Land (Land Contract),

• a Schedule (Schedule) and

• an Annexure (Annexure A)

Land Contract

Clause X provides that the Vendor agrees to sell and the Purchaser agrees to purchase from the Vendor the Land described in item X upon and subject to the terms contained in this agreement.

Schedule

Item X details the land as "An estate in fee simple …

Item x lists the Included Property as "All building improvements and other fixtures to the Land, vine plantings, all vine trellising and all fixed irrigation systems and infrastructure including water pumps

Annexure A

Clause X states in regards to the 'Going Concern Assets':

a) It is the intention and understanding of the Vendor and the Purchaser that the supply of the Going Concern Assets will be GST-free as the supply of a going concern under section 38-325 of the GST Act, and accordingly:

i. the Vendor has agreed to carry on the enterprise of a vineyard and winery until settlement;

ii. the Purchaser warrants that it will, at settlement, be registered for GST purposes; and

iii. the Vendor and the Purchaser agree that the supply of the Going Concern Assets is the supply of a going concern.

Business Contract

Relevant clauses are reproduced below:

Definitions

Assets means:

(a) plant and equipment

(b) Intellectual Property

(c) Goodwill

(d) Vendors interest in the Leased Plant and

(e) Stock

but for avoidance of doubt excludes the Excluded assets.

Business means the Vendor's winemaking and vineyard business conducted from the premises.

Excluded Assets means the Vendor's trade receivables, all books and records in relation to the Business (other than any records expressly agreed to be provided under this agreement), the Specified Stock and the items listed in Annexure B

Annexure A lists the Business Contracts assigned

There were:

X "Grape sale and purchase" agreements assigned and

X "Contract Wine processing" agreements assigned

Annexure B lists the excluded assets, being:

…..

Any third party plant or other third party chattels situated on the Premises

Various Annexures list the intellectual property supplied, the leased plant, Plant and Equipment supplied, Wine Stock Unit prices, Employee Offer Template letter and sets out the employees who are to be offered employment.

Purchase Agreement Amendment Deed. (Amendment Deed).

On ddmmyyyy the Vendor and the Purchaser entered into the Amendment Deed.

Additional information supplied re Distribution agreements.

In a letter dated ddmmyyyy the Vendors agent, advised that purchaser had requested we consider additional information.

They provided detailed information in regards to the Distribution agreements which are summarised below:

• There were x distribution agreements in place when the enterprise entered receivership (.

• When the Vendor requested the Distributors to sign an agreement to allow assignment of their agreements, X of them did not sign.

• X signed the agreement.

• The assignable distribution agreements represented approximately X% of the total receivership revenue for the enterprise.

• None of the agreements however were assigned.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 58-5,

A New Tax System (Goods and Services Tax) Act 1999 58-10,

A New Tax System (Goods and Services Tax) Act 1999 58-20 and

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

Reasons for decision

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, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au

Section 58-5 provides that any supply by an entity in the capacity of a representative of another entity that is an incapacitated entity is a supply by the other entity and making supplies in that capacity is taken to be a supply made by the other entity.

"Incapacitated entity" is defined in section 195- as:

...

(b) an entity that has a representative

"Representative' is defined in section195- as:

...

(c) a receiver

...

A bank appointed, Joint Receivers and Managers (the Receivers) over the property. Accordingly, the Receivers meet the definition of representative and Entity A meets the definition of incapacitated entity (IE).

Section 58-20 provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered for GST.

Section 58-10 provides that a representative is liable to pay any GST that the incapacitated entity would, but for this section, be liable to pay on a taxable supply, to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The Property was sold during the period of the Receivers appointment. Both the Vendor and the IE are/were registered for GST. The supply was made within the scope of the Receivers responsibility or authority. Therefore the Receivers will be liable to pay any GST that, but for section 58-10, the IE would be liable to pay on the supply of the Property and the Business.

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.

On the facts provided, the supply will be a taxable supply unless it is GST-free or input taxed. In the Vendors circumstances, there is no provision under the GST Act in which the supply will be input taxed.

Section 38-325 deals with the supply of going concerns. Subsection 38-325(1) provides that the supply of a going concern is GST-free if:

• the supply is for consideration

• the recipient is registered or required to be registered for GST, and

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

Supply is for consideration

Paragraph 38-325(1)(a) provides that the supply must be for consideration. Under the Contract the enterprise would be sold for a price of $X million. We consider that the element of consideration is satisfied.

Recipient is registered or required to be registered

Paragraph 38-325(1)(b) provides that the recipient must be registered or required to be registered. As the Purchaser is registered for GST, the element of registration is satisfied.

Supplier and recipient agreed in writing

Paragraph 38-325(1)(c) provides that the supplier and recipient must have agreed in writing that the supply is of a going concern. GSTR 2002/5 Goods and services tax: when is a supply of a going concern' GST-free? (GSTR 2002/5) explains the Commissioners view on when a supply of a going concern is GST-free. 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' (see paragraph 181 of GSTR 2002/5).

Under the Contract, the parties have agreed that the sale of the enterprise would be a supply of the going concern for the purposes of section 38-325. Therefore, the element of agreement in writing that the supply is a supply of going concern would be satisfied.

Therefore, where the supply meets the requirements of subsection 38-325(2) it will be a GST-free supply of a going concern.

Subsection 38-325(2) provides that a supply of a going concern is 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 the larger enterprise carried on by the supplier).

Supply under an arrangement

Paragraphs 19 and 20 of GSTR 2002/5 explain that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

The vineyard wine production and marketing business on the identified property were supplied under two contracts. We consider that this was a supply under an arrangement pursuant to subsection 38-325(2).

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

Paragraph 38-325(2)(a) requires that you supply all things necessary for the identified enterprise.

The enterprise

As explained in paragraphs 29 and 29A of GSTR 2002/5

29. Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

29A. These conclusions are consistent with the comments and findings of Justice Greenwood in Aurora Developments^3A (which concerned the question of whether the supply of a particular residential development site was the supply of a going concern). In particular, Justice Greenwood stated that subsection 38-325(2):

...can only operate in circumstances where an 'enterprise' has been identified comprised of particular activities (or a particular activity). An enterprise has content not just an objective.

...

Until the content of the enterprise is isolated, it is not possible to say whether all of the things necessary for its continued operation have been supplied. Section 38-325(2) (a) calls for the identification of an enterprise the subject of the supply and s 38-325(b) calls for the supplier to carry on that enterprise until the day of the supply.

The sale and purchase agreement, (Business Sale contract) defines Business to mean

'the Vendors winemaking and vineyard business conducted from the premises'.

You have identified the business conducted at the premises up until the sale as including

1 The making of wine from grapes grown on your property; and purchased from third party growers under contract.

2 Grape processing during the times of vintage, wine storage and wine treatment on behalf of third parties.

3 Selling your own wine under:

a. a number of Labels both direct to customers

b. via distribution agreements

c. through your cellar door facility located on the same property as the winery and vineyard and

d. periodic bulk wine sales and other sales to supplement income.

This is the identified business for the purposes of paragraph 38-325(2) (a).

You contended that the identified enterprise was in fact a smaller enterprise that did not include the distribution agreements. However, this does not align with the Business Contract which defines Business to mean "the Vendor's winemaking and vineyard business conducted from the premises" - subsequently clarified as including the sale of wine via distribution agreements.

Although we accept that the cellar door sales and activities on behalf of third parties generate independent revenue streams and amount to enterprise activities, the enterprise activities also included growing grapes and large scale production of wine for retail and wholesale. These activities, including the sale of wine through distribution agreements, are part of the identified enterprise.

All things necessary

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.⁹

The Vendor carried on an enterprise of grape growing, wine production and wholesale and retail sales through distribution agreements, cellar door sales, bulk sales and supplies directly to the public as well as the contract work for third parties Therefore, it is necessary to establish whether the Vendor supplied all things necessary for the continued operation of this enterprise.

The Vendor supplied various assets including trade names, intellectual property, contracts for the purchase of wine for your own purposes and contracts to process grapes on behalf of third parties, access to water licenses, viticulture assets, wine production equipment, key personal, goodwill, etc, as listed in the Land Contract, the Sale and Purchase Agreement, and the Amendment Deed.

However, on the day of supply, the Vendor did not supply a number of assets including trade receivables, all books and records in relation to the Business (other than any records expressly agreed to be provided under this agreement), the liquor license which was not issued/approved until a short time after settlement and the distribution agreements.

We accept that the trade receivables, all books and records in relation to the Business (other than any records expressly agreed to be provided under the agreement) are not a necessary part of the identified enterprise to be supplied. Therefore, it is necessary to consider whether the liquor license and the distribution agreements were part of all things necessary.

Liquor license.

The liquor license is considered to be one of the assets necessary for the continued operation of the enterprise. However, the license was issued X days after completion.

Paragraphs 47 to 57 of GSTR 2002/5 deal with 'things that the supplier can supply'. Paragraph 50 states:

50. We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

Further, paragraph 105 of GSTR 2002/5 states:

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.

An application to transfer the license was lodged on ddmmyyyyy however, when it became apparent that the date for determining whether to approve the transfer, which was later than the date set for completion, you, (the Vendor and the Purchaser) agreed to proceed in any event on the following basis:

• the Purchaser waived its right to rely on the condition

• the Vendor agreed to provide the Purchaser with all reasonable assistance to effect the transfer of the Liquor License as soon as practicable after completion and

• the Purchaser undertook not to purport to sell any liquor from the land under the Liquor license pending approval of that transfer.

The liquor license was issued to the Purchaser. Therefore, as explained in paragraphs 50 and 105 of GSTR 2002/5, we accept that the failure to supply the liquor license prior to settlement does not mean that all things were not supplied.

Distribution agreements.

The enterprise conducted on the property included the selling of wine under the distribution agreements.

Paragraphs 90 to 99 deal with an example of a supply of premises that are necessary. The principles contained in these paragraphs are relevant in your situation, ie. if an entity does not supply all the things that are considered necessary to operate that enterprise it has not made a GST free supply of a going concern.

You have contended that "…the combined percentage of total revenue that was capable of assignment was small. Therefore, these 2 distribution agreements were not core attributes of the Vendor's business operations and did not form part of the "identified enterprise" the purchaser was acquiring."

However, as per the figures that you supplied, the revenue from the sales of wine via distribution agreements represented X% of the total revenue of the identified enterprise. This is not an insignificant proportion of total revenue. Furthermore, this represents almost half of the Vendor's wine sales. Accordingly, it was necessary to supply the distribution agreements.

We accept that the Purchaser had its own distribution agreements and did not need or want the distribution agreements that the Vendor had in place. However, as noted in example 13 at paragraphs 94 - 95 of GSTR 2002/5, it is irrelevant that the Purchaser had its own distribution agreements.

You have contended that only X of the distribution agreements were capable of being assigned. Paragraph 53 of GSTR 2002/5 deals with this situation.

53. The supply of a thing which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the recipient of that thing for the purposes of section 38-325 in the following limited circumstances:

(a)   the thing must be incapable of assignment or supply because of a statutory or legal impediment; and ·

• the supplier must make all reasonable efforts to have the thing supplied to the recipient, for example by way of surrender; and

• the supply must be by a statutory authority or other party to the contract with the supplier; and

• the thing is actually supplied to the recipient by a party other than the supplier; or

(b)   if there is no statutory or legal impediment to assignment; and ·

• normal commercial practice dictates that the supply can only be effected in this way; and ·

• the supplier conditionally surrenders or terminates their right to the thing and facilitates the entry into a new arrangement between the recipient and the statutory authority or other party to the contract; and ·

• the thing is actually supplied to the recipient by the statutory authority or other party to the contract.

In the circumstances, the relevant sub paragraph is sub paragraph 53(b). In this case, the Vendor did not facilitate the transfer of the distribution agreements. Rather, the Vendor chose not to supply the agreements because the Purchaser chose not to take over the distribution agreements.

As the distribution agreements were not supplied, all things necessary for the continued operation of the enterprise were not supplied.

In summary, we consider that the sale of wine through the distribution agreements was a necessary and core part of the identified enterprise. Accordingly, the Distribution agreements were essential for the continued operation of the enterprise. As the Vendor did not supply to the Purchaser all things necessary for the continued operation of the enterprise, the paragraph 38-325(2) (a) requirement is not satisfied.

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.

Under the Contract, the Vendor would continue the enterprise until the day of settlement of the sale. Paragraph 161 of GSTR 2002/5 provides that:

161. The day of the 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. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise.

The Vendor advised in correspondence that they continued the identified enterprise up until the day of supply.

Thus, we consider that the enterprise supplied meets paragraph 38-325(2) (b).

Conclusion

Taking all the above facts into consideration, we consider that the supplies under the 'Sale and Purchase of Land Contract' and the 'Sale and Purchase Agreement' were not a supply of a GST-free going concern, pursuant to section 38-325 of the GST Act, because the Vendor did not supply all of the things necessary to conduct the identified enterprise.