Edited version of your private ruling

Authorisation Number: 1012631578055

Ruling

Subject: supply of a going concern

Question 1

Is the supply made to A Ltd by X Ltd pursuant to a Sale Deed (Deed) a supply of a going concern which is GST-free pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, the supply made to A Ltd by X Ltd pursuant to the Deed is the supply of a going concern which is GST-free pursuant to section 38-325 of the GST Act.

Question 2

Is the supply made to A Ltd by Y Ltd pursuant to the Deed a supply of a going concern which is GST-free pursuant to section 38-325 of the GST Act?

Answer 2

Yes, the supply made to A Ltd by Y Ltd pursuant to the Deed is the supply of a going concern which is GST-free pursuant to section 38-325 of the GST Act.

Relevant facts and circumstances

Applicants and related parties:

A Ltd is engaged in the marketing and distribution of products in Australia.

X Ltd and Y Ltd are members of the Y Group of companies.

A Ltd advised that the vendors referred to in the three Related Party Sale Agreements included in the Deed, i.e. P Ltd, Q Ltd and R Ltd are also members of the Y Group of companies.

Background:

The Y Group carries on wholesale and retail operations across Australia.

Most of the properties used in those operations are owned or leased by either X Ltd or Y Ltd. A few properties are owned by other companies in the Y Group. X Ltd carries on its wholesale and retail business in one State and Y Ltd carries on its wholesale and retail business in the other States.

Proposed transaction:

Under the proposed transaction A Ltd will acquire the businesses carried on by X Ltd and by Y Ltd.

X Ltd and Y Ltd are currently registered for GST. A Ltd is also registered for GST.

Sale Deed:

A copy of the Deed between X Ltd and Y Ltd as Sellers and A Ltd as Buyer was supplied with the ruling request but did not include the Annexures to the Deed (which include the three Related Party Sale Agreements).

The Deed states that on the Completion Date the Sellers must sell and the Buyer must buy the Assets and the Business free and clear of Security Interests but the Excluded Assets and Excluded Liabilities are not included in the sale and purchase. Title and risk passes on Completion.

The Deed defines 'Assets' as each asset forming part of the Business or used in the conduct of the Business, including the Goodwill, Intellectual Property, Motor Vehicles, Plant and Equipment, Inventory, Business Names and Domain Name, IT Systems, rights of the Seller in respect of transferable Authorisations, Sellers' Business Records, Sellers' rights and benefits under Business Contracts, Freehold Properties (other than Related Party Properties), and all other rights, title and interest and assets of the Sellers used in the conduct of the Business.

'Business' is defined as the business carried on by the Sellers at the Properties (other than Excluded Properties).

'Excluded Assets' is defined as Trade Debtors, Cash, loan agreements with a Related Body Corporate or Affiliate of a Seller, any agreement in respect of the provision of Financial Indebtedness, and Equipment Leases and the three Related Party Properties (which are to be acquired by A Ltd pursuant to the three Related Party Sale Agreements).

The Deed states that between the date of the Deed and immediately before Completion the Sellers must conduct the Business in the ordinary course as conducted up to the date of the Deed.

The Purchase Price for the sale of the Assets and the Business comprises a Completion Payment plus various adjustments.

The Deed obliges the Buyer to make written offers of employment to all Employees of the Sellers six weeks prior to Completion.

The Buyer does not acquire the Trade Debtors and the Deed makes the Sellers responsible for Excluded Liabilities (e.g. any liability arising in connection with a breach of contract by a Seller). The Deed states that, on Completion, the Sellers assign to the Buyer each Business Contract, subject to the Sellers and the Buyer obtaining any necessary consent prior to Completion (and where consent is not obtained, using subcontracting or other arrangements where possible).

The Deed states that the parties agree that the supply of the Business and Assets constitutes the supply of a going concern and to the understanding of the parties is accordingly GST-free. The Buyer warrants that it is registered or required to be registered for GST and will remain so until Completion. Each Seller warrants that it will carry on the enterprise constituted by the Business and the Assets until Completion. The Deed provides for the Buyer to apply for a GST private ruling confirming that the supply of the Business and Assets is a supply of a going concern.

First Related Party Sale Agreement:

The first Related Party Sale Agreement is between P Ltd as vendor and A Ltd as purchaser in respect of [certain property] including all improvements and fixtures and the Particulars of Sale indicate that the property is sold subject to lease.

The Special Conditions state that the Contract is inter-dependent with the Related Party Sale Agreements (defined as the Deed and the two other Related Party Sale Agreements) to the effect that settlement must take place simultaneously with completion of all sales and purchases under the Related Party Sale Agreements and if a party to a Related Party Sale Agreement terminates that Related Party Sale Agreement prior to Completion, the first Related Party Sale Agreement is automatically terminated.

Second Related Party Sale Agreement:

The second Related Party Sale Agreement is between Q Ltd as vendor and A Ltd as purchaser in respect of [certain property].

The Standard Terms states that the land is sold subject to the tenancies referred to in Item 10 in the Schedule.

The Special Conditions in the second Related Party Sale Agreement state that the parties agree that the second Related Party Sale Agreement is inter-dependent with the Related Party Sale Agreements to the effect that settlement under the second Related Party Sale Agreement must take place simultaneously with completion of all sales and purchases under the Related Party Sale Agreements.

Third Related Party Sale Agreement:

The third Related Party Sale Agreement is between R Ltd as vendor and A Ltd as purchaser in respect of [certain property].

The Special Conditions state that the third Related Party Sale Agreement is inter-dependent with the Related Party Sale Agreements to the effect that completion of the third Related Party Sale Agreement must take place simultaneously with completion of all sales and purchases under the Related Party Sale Agreements.

Relevant legislative provisions

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

Reasons for decision

Summary

In the present case there are two arrangements, i.e. an arrangement under which X Ltd supplies to A Ltd X Ltd's enterprise and an arrangement under which Y Ltd supplies to A Ltd Y Ltd's enterprise.

Each arrangement satisfies paragraphs 38-325(2)(a) and (b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Consequently the supply made by each of X Ltd and Y Ltd to A Ltd is the supply of a going concern. Each supply also satisfies paragraphs 38-325(1)(a), (b) and (c) of the GST Act and is GST-free.

Detailed reasoning

The requirements for a GST-free supply under section 38-325 of the GST Act:

Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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 part of a larger enterprise carried on by the supplier).

Subsection 38-325(1) of the GST Act states that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern.

The supply under the arrangement:

Paragraph 19 of GSTR 2002/5 states:

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 the present case the ruling request referred to 'the proposed supply of two…enterprises' by X Ltd and Y Ltd but the further submissions stated that there was a single arrangement:

The Deed and the Related Party Sale Agreements are multiple contracts which, together, comprise a single arrangement.

In our view there are two arrangements. Paragraph 19 in GSTR 2002/5 states that the things supplied under an arrangement must relate to the same enterprise. Both the ruling request and the further submissions stated that X Ltd carries on an enterprise in one State and Y Ltd carries on an enterprise in other States. The existence of two enterprises suggests that there are two arrangements, i.e. an arrangement under which X Ltd supplies X Ltd's enterprise to A Ltd and a second arrangement under which Y Ltd supplies Y Ltd's enterprise to A Ltd.

The 'identified enterprise':

Paragraph 21 of GSTR 2002/5 states that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business).

In the ruling request it was submitted that the business carried on by X Ltd is an identified enterprise and the business carried on by Y Ltd is an identified enterprise.

We agree.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'.

Paragraph 29 of GSTR 2002/5 states:

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.

Paragraphs 41, 42 and 44 of GSTR 2002/5 discusses the meaning of 'the supplier supplies' in paragraph 38-325(2)(a), i.e. that 'the supplier supplies' emphasises that the requirement in paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier and that that requirement must be met by the same single supplier because paragraph 38-325(2)(b) requires the supplier to carry on the enterprise until the day of supply and only an entity can carry on an enterprise.

GSTR 2002/5 then discusses the term 'all of the things that are necessary for the continued operation of an enterprise' in paragraph 38-325(2)(a) in detail (Paras 72-89). GSTR 2002/5 states that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise' (Para 72), 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 (Para 74), and that two elements are essential for the continued operation of an enterprise - the assets necessary for continued operation and the operating structure and process of the enterprise (Para 75). Paragraph 78 of GSTR 2002/5 states:

The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

In relation to whether, under each arrangement, X Ltd and Y Ltd supply all of the assets necessary for continued operation of each identified enterprise, the items included in the 'Assets' definition in the Deed and the comprehensive definitions of some of those items suggest that that is the case, although we did not see copies of some of the relevant Schedules.

Seven items are listed in the 'Excluded Assets' definition in the Deed and we consider that A Ltd will be able to carry on each enterprise without most of those items, e.g. Trade Debtors (trade debts owed to X Ltd and Y Ltd at Completion), Cash, loan agreements between X Ltd and Y Ltd and another Y Group company, any agreement in respect of the provision of Financial Indebtedness, and any Equipment Leases relating to the Assets.

The 'Excluded Assets' as defined in the Deed include the Related Party Properties which are not supplied to A Ltd by X Ltd and Y Ltd under the Deed but supplied to A Ltd by the vendors referred to in the Related Party Sale Agreements. However the further submissions pointed out that the Deed and the Related Party Sale Agreements are linked by clause [x] of the Deed (and corresponding clauses in each Related Party Sale Agreement) which state that the Deed and Related Party Sale Agreements are inter-dependent and that Completion under the Deed must take place simultaneously with completion of all sales and purchases under the Related Party Sale Agreements. It was submitted that the present case is therefore similar to Example 15 in paragraph 97 to 99 of GSTR 2002/5 which involves a tripartite agreement between the supplier of a business, the recipient of that supply, and the owner of new premises whereby the supplier sells the business (but not the premises from which the business operates) to the recipient, the recipient agrees to lease new premises from owner, and the owner agrees with the supplier to grant a lease the new premises to the recipient. Paragraph 99 of GSTR 2002/5 explains that in those circumstances the supplier supplies to the recipient 'all of the things that are necessary for the continued operation of an enterprise' because the supplier supplies to the recipient both the business and the right to occupy the new premises (as the tripartite agreement gives the supplier an enforceable right to require the owner of the new premises to grant a lease of the new premises to the recipient).

In the present case there is not a single tripartite agreement. However the Deed and the Related Party Sale Agreements are all stated to be inter-dependent on each other and A Ltd advised that the vendors under the three Related Party Sale Agreements are members of the Y Group. On that basis we agree that under each arrangement there will be a supply of all the assets necessary for the continued operation of the relevant enterprise.

In relation to whether there is a supply the operating structure and process of each identified enterprise, paragraph 78 of GSTR 2002/5 states:

The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Pursuant to clause [x] of the Deed X Ltd and Y Ltd sell the Assets and the Business to A Ltd. 'Business' is defined as a certain business carried on by the Sellers at the Properties (other than the Excluded Properties) and all other particular products distribution and marketing businesses carried on by the Sellers. In addition to the supply of the Business, some of the Assets supplied to A Ltd relate to the operating structure and process of the identified enterprises, e.g. the IT systems and the rights of the Sellers in respect of any transferable Authorisations. In addition the Deed provides for A Ltd to have access in relation to the conduct of the Business between the date of the Deed and Completion. The Deed also obliges A Ltd to make offers of employment to all Employees of X Ltd and Y Ltd. These provisions indicate that under each arrangement there is a supply of the operating structure and process of each identified enterprise.

Paragraph 42 of GSTR 2002/5 states that the requirement that there is a supply under 'an arrangement under which the supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise' must be met by the same single supplier. It was stated in the ruling request that the vendors under the Related Party Sales Sale Agreements are members of the Y Group and A Ltd advised that X Ltd and Y Ltd therefore can enforce the Related Party Sale Agreements. On that basis, X Ltd is the single supplier that supplies all things necessary under one arrangement and Y Ltd is the single supplier that supplies all things necessary under the second arrangement and paragraph 42 of GSTR 2002/5 is satisfied. Example 15 in GSTR 2002/5 (referred to above) supports this conclusion. In Example 15 a single supplier supplies to the recipient both the business and the right to occupy new premises from which to operate that business (by entering into a tripartite agreement which gives that supplier an enforceable right to require the owner of the new premises to grant a lease of the new premises to the recipient). In the present case a single supplier (e.g. Y Ltd) supplies to A Ltd the Assets and Business related to the enterprise carried on by Y Ltd plus the right to have Y Ltd procure the vendors under the relevant Related Party Sale Agreements settle those agreements simultaneously with Completion under the Deed.

For the reasons set out above we consider that there is a supply under each arrangement which satisfies paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply.

Paragraph 161 of GSTR 2002/5 states that the day of the supply 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 in relation to the supplies made by X Ltd and Y Ltd to A Ltd will be the Completion Date as defined in the Deed. The Deed states that between the date of the Deed and immediately before Completion the Sellers must conduct the Business in the ordinary course as conducted prior to the date of the Deed.

Provided that X Ltd and Y Ltd adhere to the Deed, paragraph 38-325(2)(b) of the GST Act will be satisfied.

Supply for consideration:

Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration.

Section 195 of the GST Act provides that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything.

The Deed sets out the Purchase Price (a Completion Payment plus and minus certain adjustments, an Increased Amount and any set off) and states that at or before Completion the Buyer must pay to the trust account of the Sellers' lawyers an amount equal to the Completion Payment less any set off plus an Increased Amount.

We are therefore satisfied that the supplies made by X Ltd and Y Ltd are made for consideration.

Recipient is GST registered:

Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act.

An extract from the Australian Business Register confirming that A Ltd is registered for GST was attached to the ruling request. Pursuant to the Deed A Ltd warrants that A Ltd is GST registered or required to be registered and will remain so at Completion.

We consider that paragraph 38-325(1)(b) of the GST Act is satisfied.

Supplier and recipient have agreed in writing that the supply is of a going concern:

Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern. Paragraph 178 of GSTR 2002/5 states that the supplier and recipient must have agreed in writing that the supply, being the supply under the arrangement of everything necessary for the continued operation of an enterprise, is a supply of a going concern.

The Deed states:

The parties agree that the supply of the Business and Assets constitutes the supply of a going concern and to the understanding of the parties is accordingly GST-free.

In the present case the supply under each arrangement also includes X Ltd and Y Ltd procuring the vendors under the relevant Related Party Sale Agreements to settle those agreements when Completion under the Deed occurs. Although this is not reflected in the clause of the Deed set out above, paragraph 181 of GSTR 2002/5 merely requires a mutual declaration by supplier and recipient in such a form that they agree that the supply is a supply of a going concern and we consider that that requirement is met.