Edited version of private advice

Authorisation Number: 1012633388728

Ruling

Subject: GST and supply of going concerns

Question 1

Is the supply by entity A (A) to entity E (E) 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 by entity B (B) to entity F (F) a GST-free supply of a going concern under section 38-325 of the GST Act?

Answer

Yes.

Relevant facts and circumstances

A and B were selected by entity C (C) to design, construct and operate an asset (the asset).

A and B are each registered for GST.

A and B and C entered into a number of agreements including an agreement under which C granted A and B certain leases for consideration.

C granted A the right to establish a specified business and operate the asset after its construction. A agreed to pay a business consideration fee to C in consideration for granting the lease and the right to operate that business.

A subleased the asset to B and transferred its right to operate the business to B.

A also has certain obligations in relation to the asset under its agreement with C. A has transferred the majority of its obligations under the agreement to B.

B pays consideration to A for the sublease and the transfer of the right to operate the business.

B is the operator of the asset and charges the users of the asset.

A and B are in the process of selling their respective business to E and F for separate amounts.

A, B, C, E and F have entered into various agreements under which A and B will assign their rights and obligations under the various agreements entered into with C, to E and F. E and F will assume all the rights and obligations of A and B under the agreements entered into with C. The aim of the sale is to effectively replicate the structure under the arrangement, with A being substituted with E and B being substituted by F.

All the transactions are interdependent and will occur simultaneously.

A and B have agreed that they will each carry on their respective enterprises up until the day of the supply.

The parties have agreed in writing to treat the supply of the businesses and assets as a supply of a going concern for the purposes of the GST Act.

E and F will be registered for GST on the day of the supply. In any event the entities will be required to be registered for GST from the time the sale agreements are executed.

Relevant legislative provisions

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

Reasons for decision

Questions 1 and 2

Summary

The supply by A to E is a GST-free supply of a going concern under section 38-325 of the GST Act.

The supply by B to F is a GST-free supply of a going concern under section 38-325 of the GST Act.

Detailed reasoning

Section 38-325 of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act 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).

(* denotes a term defined in section 195-1 of the GST Act)

In order to determine whether the supplies by A and B to E and F are GST-free supplies of going concerns, firstly it needs to be determined whether each sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Subsection 38-325(2)

Supply under an arrangement

As stated in paragraph 19 of Goods and Services Tax Ruling GSTR 2002/5, the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

In the current case, the enterprises being supplied by A and B will occur by way of assignment of their rights and obligations under the various agreements entered into with C, to E and F pursuant to the sale agreements.

In our view these agreements constitute an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

The term enterprise is defined in section 9-20 of the GST Act and includes, among other things, an activity or series of activities, done:

• in the form of a business

• 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 the grant of an interest in property.

A

Based on the information provided, A operates a leasing enterprise. It also has a contractual obligation to carry out certain activities in respect of the asset. B is in possession of the lease and the asset and has been paying rent periodically to A in accordance with the terms of the sublease.

B

Based on the information provided, B carries on a specified enterprise comprising of operating the asset. It also has certain obligations in respect of the asset pursuant to its agreements with A and C.

We consider that the enterprises carried on by A and B are continuous and uninterrupted and each is an 'identified enterprise'.

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

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

Paragraph 80 of GSTR 2002/5 provides that the supplier supplies 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.

Based on the information provide, we consider that all the things necessary for the continued operation of the enterprises carried on by A and B will be supplied to E and F pursuant to sale agreements. Therefore, the requirement of paragraph 38-325(a) of the GST Act will be met.

Supplier carries on the enterprise until the day of the supply

Paragraph 38-325(b) of the GST Act requires the supplier to carry on the enterprise until the day of the supply. As stated in paragraph 141 of GSTR 2002/5, 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 case, pursuant to the sale agreements, A and B have agreed to carry on their respective enterprises until the day of the supply.

Based on the circumstance of this case, we accept that A and B will carry on their respective enterprises until the day of the supply. Therefore, the requirement of paragraph 38-325(b) of the GST Act will be met.

The supplies of the enterprises of A and B to E and F are therefore supplies of going concerns under an arrangement that meets the requirements of subsection 38-325(2) of the GST Act.

Subsection 38-325(1)

The supplies by A and B to E and F also meet the requirements of subsection 38-325(1) of the GST Act as:

• the supplies are for consideration;

• E and F will be registered for GST on the day of the supply. In any event the entities will be required to be registered for GST from the time the sale agreements are executed; and

• under the terms of the arrangement all the parties have agreed in writing that the supplies are supplies of going concerns for the purposes of the GST Act.

Accordingly, the supplies of the enterprises by A to E and B to F are GST-free supplies of going concerns as they meet all the requirements of section 38-325 of the GST Act.