Edited version of your written advice

Authorisation Number: 1012932583630

Date of advice: 12 January 2016

Ruling

Subject: Goods and services tax (GST) and supply of going concern

Question 1

Will the transfer of the B assets with the granting of a lease over A assets satisfy the requirements of a GST-free going concern in accordance with Subdivision 38-J of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will the transfer of A assets with the benefit of the lease over these assets satisfy the requirements of a GST-free going concern in accordance with Subdivision 38-J of the GST Act?

Answer

Yes.

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

Relevant facts and circumstances

Background

You are the owner and operator of an enterprise (the enterprise).

The enterprise provides various services, including storage of goods.

The enterprise is located in part on freehold land.

The remainder of the enterprise is located on and uses land owned by third parties. You have long term leases over the land.

You supply your services to customers.

Your customers retain title to the goods that you store.

You decided to sell the enterprise to a group of entities (buyers 1, 2 and 3).

Transfer Agreements

1) Agreement B

You entered into agreement B to sell your B assets for a set price.

Your B assets included:

• goodwill

• plant and equipment

• intellectual property rights

• statutory licences

• contracts

• work in progress; and

• all operating current assets (trade receivables, current debtors, accrued revenue, inventory and current prepayments).

Agreement B provides that you:

• grant to buyer 1 a lease in relation to all of your A assets on Day 1

• transfer your A assets to buyer 2 on Day 2, under the terms of agreement A; and

• on Day 2 assign your obligations as the lessor to buyer 2.

Agreement B also states that you and buyer 1 agree that:

• the purchase price for your B assets does not include any GST

• the sale of your B assets, together with the lease over your A assets, is a supply of a going concern, which is GST-free

• buyer 1 is registered for GST purposes and must continue to be registered up to and including the day of the supply of your B assets

• you supply to buyer 1 all of the things that are necessary for the continued operation of your business; and

• you must carry on your business until the day of the supply of your business to buyer 1.

You agreed to arrange for your employees to be offered employment with buyer 1 on Day 1.

Buyer 1 was registered for GST on the day of the supply (completion date).

The completion date for agreement B was on Day 1.

You operated your enterprise up to the completion date.

You also entered into leases over your A assets on Day 1.

You and buyer 1 agreed that a minimum of goods would remain in storage for a fee. This agreement commenced on Day 1.

2) Agreement A

You entered into agreement A with buyer 2 for the sale and purchase of your A assets at a set price.

Your A assets comprised your freehold land in which the majority of the enterprise was located, your long-term leases of third-parties' land and all fixtures relating to the land and buildings that were part of the enterprise.

You and the buyer 2 agreed that:

• on Day 1 you would grant to buyer 1, a lease over all your A assets; and

• on Day 2 you and buyer 2 enter into an assignment deed to transfer your obligations as the lessor of the A assets to buyer 2.

Buyer 2 was registered for GST on the day of the supply (completion date).

You and buyer 2 agreed in writing that

• the purchase price for your A assets does not include any GST;

• the sale of your A assets, together with the assignment of the lease over these assets, is a supply of a going concern which is GST-free;

• buyer 2 is registered for GST purposes and must continue to be registered up to and including the day of supply of the A assets;

• you supply to buyer 2 all of the things that are necessary for the continued operation of the leasing of the A assets; and

• you must carry on the operation of leasing the A assets until the day of supply of your leasing business to buyer 2.

The completion date of agreement A was on Day 2.

You entered into a lease over your A assets on Day 1.

You operated the enterprise of leasing your A assets from Day 1.

You assigned your obligations as the lessor of the A assets to buyer 2 on Day 2.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 division 38,

A New Tax System (Goods and Services Tax) Act 1999 subdivision 38-J,

A New Tax System (Goods and Services Tax) Act 1999 section38-325,

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(a),

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(b),

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(1)(c),

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

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-325(2)(b).

Reasons for decision

Division 38 of the GST Act sets out the supplies that are GST-free. Subdivision 38-J of the GST Act governs 'supplies of going concerns'. Subsection 38-325(1) provides that a supply of a going concern is GST-free if:

(a) the supply is for consideration;

(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 as 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).

1. The transfer of the B assets and lease over the A assets

A supply under an arrangement in which the supplier supplies to recipient … an enterprise

Paragraph 19 of the Goods and Service Tax Ruling GSTR 2002/5 Goods and Services Tax: when is a 'supply of a going concern' GST-free? explains that a supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) of the GST Act (the identified enterprise).

You owned and operated the enterprise providing various services including storage of goods.

You entered into agreement B to supply to the recipient, buyer 1, all of your B assets.

All of the things that are necessary for the continued operation

Paragraph 72 of GSTR 2002/5 explains that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'.

Paragraph 73 of GSTR 2002/5 states that a 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing.

Paragraph 75 of GSTR 2002/5 explains that there are two elements 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.

You entered into agreement B to supply all your B assets which included:

• goodwill

• plant and equipment

• intellectual property rights

• statutory licences

• contracts

• work in progress; and

• all operating current assets (trade receivables, current debtors, accrued revenue, inventory and current prepayments).

You agreed with the recipient that a minimum of goods would remain in storage for safety and business continuation requirements.

You also agreed to arrange for your employees to be offered employment with the recipient, buyer 1, and grant buyer 1 a lease over all your A assets.

Paragraph 131 of GSTR 2002/5 states that paragraph 38-325(2)(a) of the GST Act recognises that the supply under the relevant arrangement of all the things that are necessary for the continued operation of part of a larger enterprise that is capable of separate independent operation may be a 'supply of a going concern'. Therefore, there may be more than one 'supply of a going concern' when separately identifiable parts of a larger enterprise are supplied.

Paragraph 133 of GSTR 2002/5 then elaborates that where the owner of both the business enterprise and the premises grant a lease of the premises to an entity by the day of the supply of the business enterprise to that entity, the supplier is supplying the entity with all of the things that are necessary for the continued operation of the enterprise.

You supplied to buyer 1 the licences, contracts, property rights and all operating assets necessary to carry on operations. You also granted buyer 1 a lease over the A assets (the land, long-term leases, buildings and fixtures comprising the enterprise), left a minimum number of goods in storage for safety and business continuation purposes, arranged for employment offers to be made to the employees and entered into other appropriate licences and contractual arrangements to enable the continued operation of the enterprise. You supplied all things necessary for the continued operation of the enterprise and satisfy paragraph 38-325(2)(a) of the GST Act. (Paragraphs 100, 101 and 102 of GSTR 2002/5 are applicable.)

The supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 explains that 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 and must be capable of continuing after the transfer.

Paragraph 161 of GSTR 2002/5 specifies that the day of supply is determined by reference to the terms of the particular contract. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all the things that are necessary for the continued operation of the enterprise.

In agreement B, you and the recipient, buyer 1, agreed that completion of the agreement would be on Day 1 and completion occurred on that date so the day of supply was Day 1.

Also on that date you leased your freehold land to the recipient and arranged for third parties to enter into long-term leases with the recipient in respect of their land.

In addition, you advised that the minimum number of goods remained in storage for a fee on Day 1. The goods were available to the buyer 1 for use in operating the enterprise.

In agreement B, you agreed with buyer 1 that you were required to carry on the business until the day of supply of the business to the recipient. You carried on the identified enterprise until Day 1, the day of the supply. Paragraph 38-325(2)(b) of the GST Act is satisfied.

As the requirements of subsection 38-325(2) of the GST Act are satisfied, the supply of your B assets in agreement B together with the lease of the A assets (your freehold land, your long-term leases of third parties' land and all the other assets relating to the land, buildings or fixtures of the enterprise) is a supply of a going concern.

Requirements for a supply of a going concern to be GST-free

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if:

(a) the supply is for consideration;

(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 sale of your B assets as outlined in agreement B was for a set price. The supply of your B assets was for consideration.

Agreement B provides that the recipient, buyer 1, is registered for GST purposes and must continue to be registered up to and including the day of the supply. It also states that you (the supplier) and the recipient agreed that the sale of your B assets together with the lease over the A assets is a supply of a going concern.

The requirements of subsection of 38-325(1) of the GST Act are satisfied. Therefore, the transfer of your B assets, in conjunction with the granting of a lease over the A assets, from you to buyer 1, is a GST-free supply of a going concern under subdivision 38-J of the GST Act.

2. The transfer of the A assets subject to a lease

A supply under an arrangement in which the supplier supplies to recipient … an enterprise

Paragraph 19 of GSTR 2002/5 explains that a supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) of the GST Act (the identified enterprise).

You entered into agreement A to supply to the recipient, buyer 2, your A assets. You advised that the completion date for the supply of the A assets was Day 2.

You also advised that on and from Day 1, you operated an enterprise of leasing the A assets based on the fact that you entered into written agreement on that date to lease the A assets to buyer 1.

Paragraphs 133 and 134 of GSTR 2002/5 explain that where the owner of both the business enterprise and the premises grant a lease to an entity (first entity) by the day of the supply of the business enterprise to that first entity and also supply the real property (the premises) to another entity (second entity) on a later day that is subject to a lease to the first entity then both supplies may be 'supplies of going concerns'. The enterprise of leasing the relevant property is conducted by the supplier up to the day of the supply, albeit for a brief period of time.

On and from Day 1 you carried on an enterprise of leasing the A assets. You supplied the A assets subject to the lease to buyer 1 to the recipient, buyer 2, on Day 2.

All of the things that are necessary for the continued operation

The A assets comprise your freehold land used for operating the enterprise, your long-term leases of third parties' land in which part of the enterprise is located and all fixtures relating to the land and buildings that are part of the enterprise.

All the A assets were leased to buyer 1 on Day 1. This was agreed between you and the recipient, buyer 2, in agreement A.

In that agreement you and the recipient, buyer 2, also agreed that on Day 2 both of you would enter into an assignment deed to transfer your obligations as lessor of the A assets to the recipient. You assigned to buyer 2 your rights and obligations as lessor under the written lease agreement.

In light of the above, you supplied to the recipient all of the things that were necessary for the continued operation of your leasing enterprise and satisfy paragraph 38-325(2)(a) of the GST Act.

The supplier carries on, or will carry on, the enterprise until the day of the supply

Agreement A provides that the completion of the transfer of your A assets occurred on Day 2 and you agreed that you would carry on your leasing business until the day of supply of the leasing business to the recipient.

Based on the circumstances that the lease was granted on Day 1 and you carried on your leasing enterprise until Day 2 which was the day of the supply, paragraph 38-325(2)(b) of the GST Act is satisfied.

As the requirements of subsection 38-325(2) are satisfied, the supply of the enterprise of leasing is a supply of a going concern.

Requirements for a supply of a going concern to be GST-free

Under subsection 38-325(1) of the GST Act a supply of a going concern is GST-free if it is for consideration and the recipient is registered or required to be registered and you both agreed in writing that the supply is of a going concern.

The sale of your A assets as outlined in agreement A was for a set price. The supply of your A assets subject to the lease was for consideration.

Agreement A provides that the recipient, buyer 2, is registered for GST purposes and must continue to be registered up to and including the day of the supply. It also provides that you (the supplier) and the recipient agreed that the sale of your A assets subject to the lease is a supply of a going concern.

Based on the above, the requirements of subsection of 38-325(1) of the GST Act are satisfied. The transfer of your A assets subject to the lease to the recipient, buyer 2, is a GST-free supply of a going concern under subdivision 38-J of the GST Act.