Edited version of your written advice

Authorisation Number: 1013059357366

Date of advice: 25 August 2016

Ruling

Subject: GST-free supply of a going concern

Question 1

Is the supply as outlined in the Contract by the Vendor to the Recipient 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 1

Yes. The supply as outlined in the Contract is a GST-free supply of a going concern under section 38-325 of the GST Act.

Question 2

If the supply as outlined in the Contract is not GST-free under section 38-325 of the GST Act:

(a) is the supply of the land forming part of the property (Land) GST-free under section 38-480 of the GST Act?

(b) if the supply of the Land is GST-free, what is the amount of GST that the Vendor must remit in relation to the supply under the Contract?

(c) if the supply of the Land is not GST-free, what is the amount of GST the Vendor must remit in relation to the supply under the Contract?

Answer 2

As the supply as outlined in the Contract is a GST-free supply under section 38-325 of the GST Act, it is no longer necessary to consider this question.

Relevant facts and circumstances

The Vendor owns the Property including Land, water entitlements, livestock, crops and plant and equipment (Property) and has conducted a Farming Business on the Land since it was acquired.

Under the Contract the Vendor agreed to sell the Property to the Recipient and the Recipient agreed to purchase the Property from the Vendor, free from encumbrances other than those disclosed in the Contract.

The Property consists of:

• Land - freehold (fee simple) land

• Plant and equipment

• Livestock and Crops

• licences, permits, quotas or similar statutory authorisations (Licences):

The consideration for the supply is the amount outlined in the Contract.

The Vendor employs one person, a farm manager, in relation to the Farming Business (Employee). The Vendor will terminate the employment of the Employee with effect from the Completion Date and the Purchaser will be at liberty to re-employ the Employee at the Completion Date.

The Employee possesses:

• all the skills, knowledge and technical know-how required to operate the Farming Business

• contacts with all suppliers, including of Contract Services, of the Farming Business, and

• contacts with past customers of the Farming Business.

For any tasks required in the Farming Business that the Employee cannot carry out, the Employee, on behalf of the Vendor, engages contract labour and other contract services (Contract Services). The providers of the Contract Services sometimes use their own plant and equipment if the Vendor's Plant is not adequate. The Contract Services are engaged on a needs basis and there is no standing Contract Services arrangement and the Vendor has no written agreements or standing contracts in relation to the Contract Services.

The Vendor has no written agreements or standing contracts in relation to the suppliers of supplies and inputs for the Farming Business and all supplies and inputs are purchased on an 'as needs' basis.

The Vendor has no written agreements or standing contracts in relation to the sales of Stock or Crop of the Farming Business and all sales are made on the open market or as negotiated with private buyers from time to time on an 'as needs' basis.

The Contract provides that the Vendor must introduce the Recipient to all contractors, suppliers and customers of the Farming Business.

The Vendor cannot transfer the Permit to Occupy to the Recipient. The relevant legislation and the terms of the Permit to Occupy, prohibit the transfer.

The Recipient was given possession to the Farming Business before Completion, but did so as the agent of the Vendor. The Recipient was required to liaise with the Vendor and follow the directions of the Vendor and obtain the Vendor's approval in relation to the sale of the Crop, Plant and Livestock. The Vendor was required to keep all necessary registrations in respect of the business in full force and effect until completion. The proceeds are the property of the Vendor and the Vendor must pay the running costs until completion.

The Vendor and the Recipient agreed that the supply being made pursuant to the Contract is a supply of a going concern in accordance with the GST Act.

Under the Contract, the Vendor warranted that:

• It is supplying all things necessary for the continued operation of the enterprise and

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

In accordance with the Contract:

• The Vendor and the Recipient agree that the supply of the Land is a supply of farm land in accordance with section 38-480 of the GST Act.

• The Vendor warrants that the Land is land on which a farming business has been carried on for at least five years preceding the supply.

• The Recipient intends to continue to operate the Farming Business.

Both the Vendor and the Recipient are registered for GST.

At settlement the Employee signed a new agreement with the Recipient. The Vendor surrendered its Permit to Occupy and the Recipient has applied for a Permit to Occupy.

Relevant legislative provisions

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

Question 1

Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(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).

(*denotes a term defined in section 195-1 of the GST Act.)

In order to determine whether the supply as outlined in the Contract is a GST-free supply of a going concern, firstly, it needs to be determined whether the supply is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Subsection 38-325(2) of the GST Act

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made.

Paragraph 38-325(2)(a) of the GST Act

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 73, 74 and 75 state:

73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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.

The term 'supplier supplies' emphasises that the elements of paragraph 38-325(2)(a) of the GST Act must be satisfied from the supplier's perspective. This is because the supplier must supply all of the things that are necessary for the continued operation of the identified enterprise to the purchaser.

The Vendor operates a Farming Business. Under the Contract, the Vendor agreed to sell the Property consisting of the Land, plant and equipment, stock in trade, Crops and Licences to the Recipient. However, the Vendor cannot transfer to the Recipient the Permit to Occupy a particular lot.

Statutory licences

Paragraphs 48 and 50 of GSTR 2002/5 discuss the situation where a licence that is necessary for the continued operation of an enterprise is incapable of assignment. Paragraphs 48 and 50 of GSTR 2002/5 state:

48. In some circumstances, it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise. For example, in some States, a logging licence cannot be assigned and must be surrendered before a new licence is issued by the relevant authority. Similarly, the benefit of certain contracts are not assignable because of the nature of the contract itself, for example, employment contracts, or because of limitations which are imposed under the relevant contract, such as franchise agreements.

50. We are of the view that the surrender of the 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 in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

Paragraph 53 of GSTR 2002/5 provides that the supply of a thing which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the recipient of that thing for the purposes of section 38-325 in limited circumstances. One of these circumstances is where the thing is incapable of assignment or supply because of a statutory or legal impediment; and

• the supplier must make all reasonable efforts to have the thing supplied to the recipient, for example by way of surrender; and

• the supply must be by a statutory authority or other party to the contract with the supplier; and

• the thing is actually supplied to the recipient by a party other than the supplier.

The Permit to Occupy is incapable of transfer to the Recipient due to a statutory impediment. In accordance with the Contract, the Vendor surrendered its Permit to Occupy and assisted the Recipient to obtain a replacement Permit to Occupy. Hence, the Vendor is considered to have supplied the Recipient with the Permit to Occupy for the purposes of the going concern provisions.

Staff

The Vendor employs a farm manager to operate the Farming Business.

Paragraph 122 of GSTR 2002/5 considers whether employees are one of the 'things that are necessary for the continued operation of an enterprise'. It states:

122. The services of employees are necessary for the operation of many enterprises. Employees are not 'things' as defined in section 195-1 and therefore are not of themselves 'things that are necessary for the continued operation of an enterprise'. As a matter of law, employment contracts are personal contracts and are incapable of assignment. The supply of the services of existing employees of an enterprise is not a thing necessary for the continued operation of the enterprise.

Paragraph 125 of GSTR 2002/5 discusses key employees. It states:

125. Some entities have key personnel whose skills and knowledge are so unique and integral to the continued operation of the enterprise that the relevant enterprise could not be conducted without the services of the particular employee. Although key employees are not 'things' capable of being supplied, the particular and unique skills and knowledge of such a key employee is the thing which is necessary for the continued operation of the enterprise. The supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge utilised by the key employee in the enterprise.

In accordance with paragraph 122 of GSTR 2002/5, for the purposes of meeting the requirement at paragraph 38-325(2)(a) of the GST Act:

• the employee is not a thing/s necessary for the continued operation of the enterprise; and

• the supply of the services of the employee is not treated as being things necessary for the continued operation of the enterprise.

At completion the employee signed a new agreement with the Recipient, thereby facilitating the transfer of skills, knowledge and technical know-how required to operate the Farming Business.

Based on the information provided, the Vendor supplied to the Recipient all of the things that are necessary for the continued operation of the Farming Business, thereby satisfying the requirement of paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(2)(b) of the GST Act

Under paragraph 38-325(2)(b), 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 (refer to paragraph 141 of GSTR 2002/5). 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 (refer to paragraph 161 of GSTR 2002/5).

Paragraph 146 of GSTR 2002/5 states:

146. The enterprise must be carried on by the supplier which may do so itself or have another entity carry on the enterprise on its behalf. However, an entity that does not have legal ownership or possession of the enterprise is not in a position to deal with that enterprise and therefore cannot be the supplier of all of the things that are necessary to continue to operate the enterprise.

The Recipient was given possession to the Farming Business before Completion, but did so as the agent of the Vendor. The Recipient was required to liaise with the Vendor and follow the directions of the Vendor and obtain the Vendor's approval in relation to the sale of the Crop, Plant and Livestock. The Vendor was required to keep all necessary registrations in respect of the business in full force and effect until completion. The proceeds are the property of the Vendor and the Vendor must pay the running costs until completion.

Based on the information provided, the Vendor has effective control and possession of the enterprise until completion.

Hence, the requirement under paragraph 38-325(2)(b) of the GST Act that the Vendor continue to carry on the enterprise until completion of the Contract is satisfied.

As the requirements of subsection 38-325(2) of the GST Act are satisfied, the supply as outlined in the Contract is a supply of a going concern.

Subsection 38-325(1) of the GST Act

For the supply of a going concern to be GST-free, all of the requirements listed in subsection 38-325(1) of the GST Act must be met.

In this case, the supply is for consideration, the Recipient is registered for GST and both parties agreed in writing that the supply is of a going concern. Hence, the requirements of paragraphs 38-325(1)(a), 38-325(1)(b) and 38-325(1)(c) of the GST Act are satisfied.

Therefore, as all of the requirements of subsection 38-325(1) of the GST Act are satisfied, the supply as outlined in the Contract is a GST-free supply of a going concern.

Question 2

As the supply as outlined in the Contract including the Land is a GST-free supply under section 38-325 of the GST Act, it is no longer necessary to consider whether the supply of the Land is GST-free under section 38-480 of the GST Act.

Furthermore, as the the supply as outlined in the Contract is GST-free, the Vendor does not have an obligation to remit GST in relation to the supply.