Edited version of your written advice

Authorisation Number: 1012809993537

Ruling

Subject: GST and the supply of a GST free going concern

Question

Is the sale of your enterprise 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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

• You are a company and are registered for goods and services tax (GST).

• You operate an enterprise offering a full range of a particular medical procedure. (the enterprise).

• You were placed into Voluntary Administration due to a dispute between the shareholders of the Company. An Administrator was appointed.

• Due to the dispute between the shareholders, the hospital temporarily ceased performing surgical procedures.

• Upon the appointment of the Administrator, all employees, with the exception of one full-time employee, had their employment terminated.

• You have executed an agreement for the sale of the enterprise to a syndicate of existing shareholders. The sale price is $x,xxx,xxx plus the value of stock. The sale agreement provides that all things necessary for the continued operation of the enterprise will be supplied to the purchaser.

• You continue to lease the premises from which the enterprise operates and the facility is currently equipped to recommence performing medical procedures upon the completion of the sale of the enterprise.

• All other contracts and registrations necessary for the operation of the enterprise remain in place.

• The purchaser is registered for GST.

• The sale agreement contains a clause which provides that the seller and buyer agree that the sale is of a going concern.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5.

Section 38-325.

Subsection 38-325(1).

Paragraph 38-325(1)(a).

Paragraph 38-325(1)(b).

Paragraph 38-325(1)(c).

Subsection 38-325(2).

Paragraph 38-325(2)(a).

Paragraph 38-325(2)(b).

Reasons for decision

Summary

The sale of the sale of the enterprise is not a GST-free supply of a going concern as you do not carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply and you do not supply all of the things that are necessary for the continued operation of an enterprise (employees) and therefore the supply does not satisfy all of the requirements of section 38-325 of the GST Act

Detailed reasoning

Taxable Supply

Under section 9-5 of the GST Act, 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 satisfies the positive limbs of section 9-5 of the GST Act and raises the issue of whether the supply is 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 of the GST Act are met.

Goods and Services Tax Ruling GSTR 2002/5 discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act 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 of the GST Act:

• 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; 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;

• the supply must be for consideration;

• the recipient of the supply must be registered or required to be registered for GST; and

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

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) of the GST Act 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.

The Sale Agreement provides for the acquisition of the enterprise and associated sub-leases.

In our view, the Sale Agreement constitutes an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

Supplier carries on the enterprise until the day of the supply

Under subparagraph 38-325(2)(b) of the GST Act, 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. 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.

Paragraphs 141 to 145 of GST 2002/5 discuss the ATP's view of the "Supplier carries on the enterprise until the day of the supply", they state:

141. The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

142. A supply will not be a 'supply of a going concern' where, on the day of the supply, the activity carried on by the enterprise has ceased. The New Zealand case of Belton v. CIR (1997) 18 NZTC 13,403 provides a useful illustration of a failure to fulfil a similar requirement under the New Zealand law. In that case, an owner of an operating motel sold the motel. Under the contractual agreement, the sale was subject to vacant possession and the land, building and chattels only were transferred to the purchaser. At settlement, the motel had been closed down and there were no future bookings. After the settlement date, the premises was not immediately operated as a motel, but began operating again several weeks later.

143. The Court accepted that the vendor had supplied all the assets necessary for the supply of the motel as a going concern:

'The fact that the purchaser could resume operations shortly after the transfer illustrates that there was available a business structure as well as the business activity. Mr Belton could exploit the location goodwill and the benefits flowing from pre-existing clientele, advertising and background. At settlement he was in a position to resume the operation of the motel business notwithstanding the vacant possession which he demanded and received.'

144. However, the supply was held not to be of a going concern because, at the time of the supply, the motel business was not operating.

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement, has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

We consider that the motel example above in paragraphs 142 to 144 is on a par with your situation.

You carry on an enterprise carried on by you is that of operating a facility offering a full range of particular medical procedures. Due to a dispute between the shareholders, the hospital temporarily ceased performing these procedures and whilst you have advised that it will recommence the procedures after the sale it is our view that you have not continued to carry on the enterprise until the day of the supply.

As the operation of the enterprise are not operating at the day of the supply subparagraph

38-325(2)(b) of the GST Act is not satisfied.

Whilst you have contended that paragraph 145 of GSTR 2002/5 applies in your circumstances we consider that this paragraph only relates to those circumstances where an enterprise has ceased for purposes that are ancillary to its main purpose such as cleaning or maintenance to facilitate its supply of everything necessary for the continued operation of the enterprise. In your case the enterprise ceasing performing medical procedures is not for the purposes of facilitating the supply of everything necessary for the continued operation of the enterprise, but rather occurred as a result of a dispute between the shareholders.

As subsection 38-325(2) of the GST Act are not satisfied it is not necessary to consider subsection 38-325(1) of the GST Act.