Edited version of your written advice

Authorisation Number: 1013126237253

Date of advice: 2 December 2016

Ruling

Subject: Supply of a going concern

Question

Is the supply made pursuant to a Sale Agreement by the Vendor which is an authorised corporate representative of A Ltd of the Assets (as defined) and Business (as defined) to the Purchaser a GST- free supply of a going concern within the meaning of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply made by the Vendor to the Purchaser of the Assets pursuant to the Sale Agreement is a GST-free supply of a going concern within the meaning of section 38-325 of the GST Act.

Relevant facts and circumstances

Vendor:

The Vendor carries on business providing professional advice to a number of clients. The Vendor currently employs one full-time employee and two part time employees in the business. The Vendor is registered for GST with effect from 20YY.

Purchaser:

The Purchaser is registered for GST with effect from 20XX.

Sale Agreement:

Pursuant to the Sale Agreement the Vendor has agreed to sell to the 'Assets' and 'Business' to the Purchaser for the Purchase Price free from any Encumbrance at Completion, subject to the Conditions being met or waived, or at any other time as the parties agree.

The Sale Agreement defines 'Assets' as:

● the Client List;

● the Client Servicing Rights (defined as the rights to contact and provide professional planning services to the Clients (defined as clients of the Vendor), to access the Client Records and to receive all revenues arising from those Clients)

● the Client Contracts (defined as all agreements entered into by the Vendor in the conduct of its Business (defined below) with the Clients);

● the Records (defined as all documents used by the Vendor primarily in the conduct of the Business);

● the Fee Entitlement (defined as all of the Vendor's entitlement to receive fees and commissions payable after Completion which are referable to services (whensoever provided) and professional products recommended to Clients);

● the intellectual property associated with the Business;

● the Business name; and

● specified assets (office furniture and a computer as listed in the Sale Agreement).

'Business' is defined in the Sale Agreement as the professional planning business conducted by the Vendor.

In the ruling request it was stated that the Purchaser has also agreed to employ the full-time employee currently employed by the Vendor, but not to employee two part-time employees currently employed by the Vendor.

The Sale Agreement obliges the Vendor to carry on the Business in the ordinary course from the date of the Sale Agreement until Completion.

The Sale Agreement provides that at Completion the Vendor must deliver to the Purchaser the Assets and produce to the Purchaser written approval from A Ltd approving the sale and Purchaser must pay the Vendor the Purchase Price.

Although the Assets include the business name, the Sale Agreement provides that this is for the purpose of prohibiting other parties from using the business name and that the Purchaser warrants that the Purchaser will not advertise or use the business name other than for the purpose of identification or redirection of the Vendor's business to the Purchaser.

The Sale Agreement allocates profits and losses from operation of the Client List during the period up to Completion to the Vendor and during the period after Completion to the Purchaser.

The Sale Agreement provides that upon Completion the Vendor will use best endeavours to divert telephone and facsimile number associated with the Business to the Purchaser.

The Sale Agreement provides for all Client Contracts to be assigned by the Vendor to the Purchaser on and with effect from the Completion Date and obliges the Vendor to dispatch a letter or email within 5 business days of Completion informing Clients of the transaction under the Sale Agreement.

The Sale Agreement provides that the Vendor and the Purchaser warrant that they are registered for the purposes of GST, contains a warranty by the Vendor that the Vendor will carry on the business and/or operation of the assets referred to pursuant to the Sale Agreement until the day of the supply and provides that the parties agree that the Sale Agreement is a going concern for the purposes of GST.

Relevant legislative provisions

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

Reasons for decision

Summary

For the purposes of subsection 38-325(2) of the GST Act we consider that the identified enterprise in relation to the Vendor is the 'Business' as defined in the Sale Agreement, i.e. the professional planning business conducted by the Vendor.

We consider that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act are satisfied in relation to the identified enterprise.

We also consider that the requirements of subsection 38-325(1) of the GST Act are satisfied.

Detailed reasoning

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 which 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)

Goods and Services Tax Ruling GSTR 2002/5 (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.

Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act.

Subsection 38-325(2) - identified enterprise:

Paragraph 21 of GSTR 2002/5 states:

21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'.

Paragraph 22 of GSTR 2002/5 refers to the definition of 'enterprise' in section 9-20 of the GST Act which provides that that an enterprise includes, among other things, an activity or series of activities done in the form of a business.

Paragraph 178 of Miscellaneous Taxation Ruling 2006/1 (MT 2006/1) provides that the indicators of a business include a significant commercial activity, an activity which is systematic and organised and activities of a reasonable size and scale. In our view the identified enterprise in the present case is the 'Business' as defined in the Sale Agreement, i.e. the professional planning business conducted by the Vendor.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise.

In the present case the Sale Agreement states that the Vendor agrees to sell the 'Assets' (as defined) and the 'Business' (as defined), produce at Completion a written approval of the sale by A Ltd, divert phone and facsimile numbers associated with the Business to the Purchaser, assign all Client Contracts and dispatch letters or email to Clients informing Clients of the transaction under the Sale Agreement. In addition, the Purchaser has agreed to employ the Vendor's full-time employee. However, the Vendor is not transferring the premises at which the Vendor carries on the business and the Purchaser is not taking on the Vendor's part-time employees.

Paragraph 47 of GSTR 2002/5 states:

47. The term 'thing' is defined in section 195-1 as anything that can be supplied or imported. The things which are necessary for the continued operation of an 'identified enterprise' will vary according to the nature of the enterprise and the thing supplied.

Paragraphs 72 to 75 of GSTR 2002/5 state:

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

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.8 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

Paragraph 103 of GSTR 2002/5 provides that statutory licences, permits, quotas or similar things other than personal qualifications must be supplied in order for there to be a supply of a going concern. This is qualified in paragraphs 104 to 107 of GSTR 2002/5 which provide that where a supplier is permitted to transfer an authorisation or permission the supplier must either transfer it (and may attempt to get permission from a relevant entity) or surrender it and request that it be re-issued to the recipient. In the present case, where the Vendor and Purchaser are both authorised corporate representatives of A Ltd, we accept that the transfer or surrender and re-issue of any relevant authorisation or permission is not essential in order for paragraph 38-325(2)(a) of the GST Act to be satisfied and we note that the Sale Agreement obliges the Vendor to produce to the Purchaser at Completion a written approval of the sale from A Ltd.

In relation to premises, paragraph 90 of GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, those premises must be supplied. However, this is qualified by paragraph 92 of GSTR 2002/5:

92. In limited circumstances, an enterprise may not need to operate from premises and therefore premises are not one of the things necessary for the continued operation of that enterprise. This is the case where an enterprise requires few tangible assets, for example, a personal fitness trainer who visits clients and does not need any premises to operate the enterprise.

In the present case we accept that as the identified enterprise has few tangible assets and the supply is from one authorised corporate representative of A Ltd to another (which is offering employment to a fulltime employee of the Vendor and therefore presumably has suitable premises) the Vendor's premises are not necessary for the continued operation of the identified enterprise.

Paragraph 38-325(2)(b):

Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as a part of a larger enterprise carried on by the supplier).

Paragraphs 141 and 142 of GSTR 2002/5 provide that 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 to new ownership and that 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.

Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case we consider that the day of the supply will be the Completion Date as defined in the Sale Agreement (the day on which Completion occurs) as clause 6 of the Sale Agreement provides that title to and possession of the Assets passes to the Purchaser at Completion.

The Sale Agreement obliges the Vendor to carry on the Business in the ordinary course from the date of the Sale Agreement until Completion and contains a warranty by the Vendor that the Vendor will carry on the Business until the day of supply.

We therefore consider that the supply made by the Vendor under the Sale Agreement will be a supply under an arrangement that satisfies paragraph 38-325(2)(b) of the GST Act.

Requirements in subsection 38-325(1)

Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. Clause 7.1 of the Sale Agreement states that the purchase price for the Assets is $$$ (excluding GST).

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered for GST or required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. The Sale Agreement includes a warranty that the Purchaser is registered for GST and we have confirmed that the Purchaser was registered for GST with effect from 2003.

Paragraph 38-325(1)(c) requires that the supplier and recipient have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides that 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a supply of a going concern. Although the Sale Agreement provides that the parties agree that the Sale Agreement is a going concern (rather than that the supply made under the Sale Agreement is a supply of a going concern), we consider that the Sale Agreement evidences the agreement required by paragraph 181 of GSTR 2002/5.