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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012885509806

Date of advice: 30 September 2015

Ruling

Subject: GST-free going concern

Question 1

Was the supply by Entity A to Entity B under the arrangement a supply of a going concern which is GST-free under section 38-325(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

• Entity A is registered for the goods and services tax (GST) and has been operating a business.

• Entity A entered into an arrangement with Entity B whereby Entity A agreed to sell part of its business to Entity B on Completion Date. Amongst other things, Entity A agreed to

    • transfer to Entity B the goodwill of the business in respect of a group of its clients

    • assign to Entity B the office equipment leases and the leased business premises

    • assign to Entity B the registered business name

    • transfer employment contracts of relevant employees

• Entity A will pay all wages and superannuation for the transferring employees up until Completion Date. Entity B will offer employment to identified employees effective from the Completion Date and take responsibility for the transferring employees. All entitlements accrued by the transferring employees will be transferred to Entity B. Entity B assumes the employee entitlements from Completion Date.

• All the Business Assets including the clients of Entity A (transferring clients), the business records, the leased business premises, registered business name, plant and equipment and goodwill were supplied by Entity A to Entity B on Completion Date. The supply was for consideration.

• Entity A assigned its interest in the leased premises to Entity B from the Completion Date. The Assignment Date was the Completion Date.

• Entity A must pay to the landlord the rent and outgoings payable under the Lease up to and including the Assignment Date. The Lease will bind the assignee from the Assignment Date. From the Assignment Date, Entity B must pay to the landlord all of the rent and other money payable under the Lease and must perform the obligations under the Lease.

• From Completion Date, Entity B began operating the business with the transferring clients and the transferring employees from the leased premises.

• Until Completion Date, Entity A continued to conduct its business servicing all its clients, including the clients transferring to Entity B.

• Under the written agreement, the vendor and purchaser have agreed that the supply under the agreement constitutes the supply of a going concern for GST purposes.

• Entity B is registered or required to be registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 and

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 where the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Subsection 38-325(1) of the GST Act provides 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 of a going concern.

The term 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act and provides that 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 part of a larger enterprise carried on by the supplier).

*The asterisked terms are defined in section 195-1 of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 74 and 75 of GSTR 2002/5 state:

    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 advertisement and promotion.

Further, paragraph 80 of GSTR 2002/5 states:

    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.

From the information provided the vendor has carried on the identified enterprise prior to selling the Business Assets. It is this enterprise that the vendor will need to carry on until the day of the supply and for which the vendor must supply all of the things that are necessary for its continued operation in order to satisfy the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act.

The Business Assets including the transferring clients, the transferring employees, the business records, the vendor's interest in the leased business premises, the registered business name, plant and equipment and goodwill were supplied by Entity A to Entity B on Completion Date. Entity A was liable to pay to the landlord the rent and outgoings payable under the Lease up to the day of supply. Entity B began operating the enterprise with the transferring clients and the transferring employees from the leased premises, from Completion Date. Accordingly, Entity A has supplied to Entity B all of the things that are necessary for the continued operation of the identified enterprise and the requirement under subsection 38-325(2)(a) of the GST Act has been satisfied.

Entity A was liable to pay all wages and superannuation for the transferring employees up until Completion Date. Entity A continued to carry on the enterprise and provided the required services to all its clients, including the clients transferring to Entity B until Completion Date. Accordingly, the requirement under subsection 38-325(2)(b) of the GST Act has also been satisfied.

As the requirements of both paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act have been met, the supply by Entity A to Entity B under the arrangement is a supply of a going concern.

According to the facts, the requirements of subsection 38-325(1) of the GST Act are also satisfied. Therefore, Entity A makes a GST-free supply of a going concern under section 38-325 of the GST Act when it supplies the Business Assets to Entity B under the arrangement.


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