Edited version of your written advice

Authorisation Number: 1012869618337

Date of advice: 31 August 2015

Ruling

Subject: Goods and services tax - Property - Going concern

Question 1

Is your supply of a shop 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

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a sole trader registered for GST in the food industry.

You own and operate a business from business premises in Australia.

You occupy the business premises as a periodical tenant. You are a periodical tenant as your fixed term lease has expired and your tenancy is now subject to the monthly tenancy provisions of that lease.

You have entered into a contract to sell the business to another entity (the Purchaser).

The purchaser is also a sole trader registered for GST in the food industry.

According to clause 2 of the sales contract, the business comprises the following assets:

1. Goodwill of the business

2. All rights and interests in the shops unregistered business name

3. The items of equipment listed in the Annexure A to the contract.

Annexure A to the sales contract includes equipment such as:

• Refrigeration equipment

• Cash register

• Kitchen equipment

• Tables

• Crockery

Clause 10 of the sales contract also states that on completion of the contract you will vest in the purchaser title to and possession and control of the business and each asset included in the sale and will deliver to the purchaser the following:

• The documents and certificates in your possession establishing or evidencing title and ownership to the business and to each asset included in the sale

• All licences, authorities and permits you currently hold in respect of the business

• The keys and security devices required to access the business premises or use any asset included in the sale of the business.

The purchase price is set out in the sales contract.

The sale contract is subject to and conditional on:

1. the lessor of the business premises agreeing prior to the completion of the sale contract to grant the purchaser a lease of the business premises in a form acceptable to the purchaser

2. the termination of your periodical tenancy.

Clause 16.2 of the sales contract provides that the business will be operating up to and including the day of completion of the sales contract.

The purchaser intends to carry on the business from the day after completion of the sales contract so that there are no breaks in operation of the business.

You will co-operate with the purchaser to enable the purchaser to receive from the date of completion of the sale contract the benefit of all the existing services to the business at the business premises including the supply of electricity, gas, water and telephone.

You are willing to assign the periodical lease to the purchaser however; the purchaser believes that they would have no security of tenure without the grant of a new lease.

Clause 1 of the sales contract defines vendor to include the vendor's legal representative.

Paragraph 33.1 of the sales contract represents both parties agreement that the sale of the business and the stock in trade constitutes the sale of a going concern and will not be subject to GST on the sale price.

Paragraph 33.2 of the sales contract requires the purchaser to obtain a private ruling from the Australian Taxation Office (Tax Office) confirming that the sale is the sale of a going concern.

Paragraph 33.5 of the sales contract stipulates that if said private ruling is unfavourable that the sale will be treated by both parties as a taxable supply.

In correspondence dated mid-August 20XX your legal representative confirmed that you are also a party to the private ruling application submitted by the purchaser.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2)

Reasons for decision

In this reasoning, please note:

• All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

• All terms marked by an *asterisk are defined terms in the GST Act.

Subsection 38-325(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the supply of a going concern for GST purposes as a supply under an arrangement in 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.

Section 195-1 defines 'thing' as anything that can be supplied or imported.

Subsection 38-325(1) goes on to state that 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 a of a going concern.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the operation of section 38-325. The principles outlined in GSTR 2002/5 have been applied in this case.

Paragraphs 38-325(2)(a) and (b) require the going concern conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

The fact that you are carrying on a business enterprise is not disputed.

An arrangement satisfies paragraph 38-325(2)(a) where each of the following elements is present:

• the supplier supplies to the recipient;

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

• of an enterprise

In this case, you had a lease on business premises from which you operate the business. Since the expiration of the lease you have continued to occupy the premises on a periodical basis and operate the business.

Under the sales contract you will be supplying to the purchaser the following:

• business goodwill

• all rights and interest in the business name

• specific items of equipment

• all licences, authorities and permits you hold in respect of the business

• the keys and security devices required to access the business premises or any asset included in the sale of the business.

It is apparent, therefore, that the rightful occupation of the business premises is necessary for the continued operation of the café enterprise.

In paragraph 48 of GSTR 2002/5 the Commissioner gives an example of a situation where it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise. The example given is a logging licence in Marbut Gunnersen Industries Pty Ltd v FC of T 82 ATC 4182; (1982) 12 ATR 926.

The Commissioner goes on to explain in paragraph 50 of GSTR 2002/5 that the surrender of a 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 where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant entity (where that surrender is itself a perquisite for the issue of a new licence, permit or quota).

As you are unable to assign the right to occupy the relevant business premises under a fixed term, your surrender of your periodical tenancy could be seen as a prerequisite for the issue of a new fixed term tenancy by the building owner to the purchaser and therefore the supply of the right to occupy the business premises.

Similarly in paragraph 51 of GSTR 2002/5, the Commissioner states that where the relevant thing is the rights under an existing contract to a third party, the surrender of those rights, in circumstances where the third party has committed to enter into a contract under which substantially similar rights will be created in favour of the recipient, will satisfy the requirement that the relevant thing is supplied.

Specific to your circumstances, in paragraph 58 of GSTR 2002/5 the Commissioner points out that where an enterprise operates from leased premises, the supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the premises by the day of the supply.

In this case, we consider that the surrender of your periodical lease to facilitate a new lease between the lessor and the purchaser, is the effective supply of the right to occupy the business premises. As such, we consider that you are supplying to the purchaser all things that are necessary for the continued operation of the café business and therefore paragraph 38-325(2)(a) is satisfied.

The provisions of clause 16.2 of the sales contract evidences that you will be carrying on the business up to and including the day of the supply, thereby satisfying paragraph 38-325(2)(b).

As we have found that your supply of the business to the purchaser qualifies as the sale of a going concern, we must now consider whether that supply is GST-free.

As your supply of the business is for the purchase price set out in clause 3 of the sales contract, paragraph 38-325(1)(a) of the GST Act is satisfied.

As both you and the purchaser are registered for GST, paragraph 38-325(1)(b) is also satisfied.

You and the purchaser have agreed in clause 33.1 of the sales agreement that the sale constitutes the sale of a going concern, thereby satisfying paragraph 38-325(1)(c) .

Consequently, as all of the requirements of subsection 38-325(1) have been met, the sale of the business will constitute a GST-free supply of a going concern.