Edited version of private advice

Authorisation Number: 1012648110090

Ruling

Subject: GST and the supply of a going concern

Question 1

Is the supply of the contestable metering business the GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the supply of the contestable metering business will be a GST-free supply of a going concern.

Relevant facts and circumstances

As part of a larger enterprise, the entity operates a business which includes the provision (by lease), installation and maintenance of physical assets on clients' premises as well as the collection, processing, storage and delivery of data in relation to those assets.

The entity has offered its business for sale in accordance with the terms set out in the Sale and Purchase Agreement (SPA). The SPA provides that the sale includes, amongst other things:

• goodwill;

• rights under contracts with customers;

• the business name;

• intellectual property rights;

• physical assets; and

• associated records.

The SPA provides that certain assets will not be supplied including:

• cash;

• trade debts;

• certain specified contracts, including:

- agreements for future acquisitions of physical assets;

- information technology agreements;

- employment agreements;

- insurance contracts;

- loan agreements; and

- guarantees;

• information technology software and hardware (other than a copy of a specific application); and

• inventory;

The purchase price is provided in the SPA and will be subject to certain adjustments.

The SPA states that the entity and the Buyer must enter into a Transitional Services Agreement (TSA). Under the TSA, the entity will provide the Buyer with a range of services including:

• sales and marketing;

• contract management and billing; and

• various other services.

The TSA will operate for a specified period and can be extended by agreement and the Buyer will pay the entity for services provided under the TSA.

Relevant legislative provisions

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

Reasons for decision

The supply of a going concern is GST-free under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if certain requirements are met:

38-325 Supply of a going concern

(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).

Subsection 38-325(2) of the GST Act provides a number of concepts that must be present for there to be a supply of a going concern including:

• the supplies are made under an arrangement; and

• there is an identified enterprise; and

• all of the things that are necessary for the continued operation of the enterprise are supplied; and

• the supplier will carry on the enterprise until the day of the supply.

Arrangement

Goods and Services Tax Ruling GSTR 2002/5 provides the ATO view on the operation of section 38-325 of the GST Act and, at paragraph 16, states:

16. There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b)….

As explained in paragraphs 19 and 20 of GSTR 2002/5, an arrangement may be made up of a number of separate but related contracts. The supplies being made by the entity to the Buyer will be done under the Sale and Purchase Agreement (SPA) in conjunction with the Transitional Services Agreement (TSA). This is 'an arrangement' as it relates to a single transaction.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act and includes activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The enterprise being supplied by the entity the provision, installation and maintenance of physical assets as well as the collection, processing, storage and delivery of data.

Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of 'enterprise' in detail and, at paragraph 177 and 178 in relation to 'in the form of a business', states:

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

• a significant commercial activity;

• a purpose and intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

This is supplemented by paragraph 37 of GSTR 2002/5 which states:

37. The following elements are indicators that part of an enterprise may be carried on 'in the form of' a business:

• a degree of autonomy;

• a separate management structure;

• a system of internal user charging;

• a separate budget; and

• agreements with internal service providers or external customers.

It is accepted that the entity carries on an enterprise in the form of a business in relation to its activities. This is because the business is a significant commercial activity, is operated as an autonomous business with separate reporting of costs and a distinct customer base and is continuously operated in a businesslike manner.

All things necessary

Paragraph 72 of GSTR 2002/5 explains that the term 'necessary' means every core attribute of an enterprise that is essential for its continued operation. It does not mean every conceivable thing which might be used in the enterprise. There are a number of things that are likely to be necessary for the continued operation of the contestable metering business. Paragraphs 74 and 75 of GSTR 2002/5 explains that the 'identified enterprise' has two essential elements which must be supplied:

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.

In the context of paragraph 75 of GSTR 2002/5, the two elements of the business being sold by the entity can be summarised as the assets being sold under the SPA and the operating structure being supplied via the TSA.

The business involves the entity providing (by way of lease), installing and maintaining physical assets. These services are necessarily performed at the premises of the entity's customers. In addition, the entity also collects, processes, stores and delivers data to various stakeholders. These services, as well as the general operation of the business, are performed by the entity at its premises.

The Buyer will operate the business by contracting with the entity (via the TSA) to provide the majority of the operating structure of the business. Consequently, the premises are not needed to be supplied when the operating structure is provided by way of the provision of services for a period rather than the sale and transfer of assets used to undertake the operations. Nevertheless, the TSA provides access rights to the premises for the Buyer including the provision of the use of an office. Consequently, the entity is either supplying the premises or the premises are not necessary for the continued operation of the enterprise being sold.

Other assets that are currently used by the entity in its operation of the business include information technology (software and hardware) and telecommunications contracts. Although these assets are not being transferred by way of sale under the SPA, the entity is supplying each of these things by providing the specified services under the TSA.

As discussed at paragraph 125 of GSTR 2002/5, although employees are not 'things' capable of being supplied, the 'supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge utilised by the key employees in the enterprise'. The entity supplies the skills and knowledge when it supplies the services under the TSA. Furthermore, the TSA requires the entity to assist the Buyer to obtain a transfer of the entity's knowledge and know-how relating to the business.

There are other assets used by the entity in its operations that are not being supplied under the SPA and TSA including, cash, certain inventory, debtors, certain records and certain contracts. None of these assets are 'necessary for the continued operation of the enterprise'.

The combination of the SPA and the TSA results in the entity providing 'all things necessary' for the continued operation of an enterprise.

Supplier will carry on the enterprise until the day of the supply

The SPA states that the entity 'must carry on until Completion, which will be the day of supply, the enterprise described in this document'. From the clients' perspective, there will be little (if any) noticeable change in the operation of the business.

GST-free

The supply of the contestable metering business (as described above) is GST-free under subsection 38-325(1) of the GST Act provided that:

• it is for consideration;

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

• both the supplier and recipient agree in writing that that the supply is of a going concern.

The consideration for the supply is stated (with adjustments) in the SPA. The SPA states that the Buyer warrants to the entity that 'on Completion the Buyer is registered for GST purposes and its Australian Business Number is as stated above, or that on Completion the Buyer is required to be registered for GST purposes and has applied for registration'. Finally, the SPA states that the entity and the 'Buyer agree that the supply of the Assets by the Seller to the Buyer is a supply of a going concern.'

Therefore the supply of the business by the entity under the SPA will be a GST-free supply of a going concern under section 38-325 of the GST Act.