Edited version of your written advice

Authorisation Number: 1013137028911

Date of advice: 19 December 2016

Ruling

Subject: supply of a going concern

Question 1

Is the supply made by the Vendor to the Purchaser pursuant to the Contract 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

No.

Relevant facts and circumstances

The Vendor carries on business as a native plant nursery and bushland restoration services.

Pursuant to the Contract the Vendor agrees to sell the native plant nursery part of the Vendor's business to the Purchaser.

The Contract states that:

the Purchaser agrees to purchase the native plant nursery part of the Vendor's business as a going concern, excluding the business name and any land but including:

Product 1;

Product 2; and

Product 3;

the purchase of Product 1 by the Purchaser will be based on a stock take and on the basis that tube stock can remain at the Vendor's premises, be maintained by the Purchaser (without charge by the Vendor for electricity, water or use of space and using the Vendor's equipment (tractors, trailer, computer)), sold by the Purchaser from the Vendor's premises from [ ] early 201X (invoiced by the Purchaser using the Purchaser's accounting package) and removed by the Purchaser from the Vendor's premises at the Purchaser's cost no later than [ ] early-mid 201X;

the Vendor's sales phone number and phone is to be transferred to the Purchaser's business account from [ ] early 201X;

a current employee of the Vendor becomes an employee of the Purchaser as from [ ] early 201X (if the employee agrees);

for the period of three months commencing [ ] early 201X the Vendor is to forward to the Purchaser all email inquiries about plant sales received by the Vendor;

the Purchaser is entitled to email all of the Vendor's customers in early 201X and the Vendor's website is to refer to the Purchaser from early 201X;

the Vendor agrees to transfer to the Purchaser all current customer lists, supplier lists, details of sales total by customer and current stock list for advertising;

the Vendor receives the benefit of all orders received up to [ ] early 201X for delivery before [ ] early 201X plus orders for delivery after [ ] early 201X which are confirmed before the date the Contract is signed; and

the Purchaser receives the benefit of all plant orders and contract grow orders received from customers after the date the Contract is signed and which are for delivery after [ ] early 201X.

The price payable by the Purchaser to the Vendor pursuant to the Contract is estimated to be $XX plus GST (if applicable) up to a maximum of $XX plus GST (if applicable) calculated at agreed rates in relation to Product 1, Product 3 and Product 2 and including $XX for goodwill.

A second document with the Vendor's letterhead and entitled 'To whom it may concern' and attached to the ruling request is dated [ ] late 201X and signed by the Vendor and Purchaser and states:

In relation to the pending sale of business between [Vendor] and [Purchaser], we the Purchaser and we the Vendor agree that the supply is a supply of a going concern.

The Vendor confirmed that the Vendor has a single website which refers to both parts of the business carried on by the Vendor (i.e. native plant nursery and restoration of native bushland) and that a reference to the sale of the native plant nursery business to the Purchaser will be added to the website. The Vendor also stated that the Vendor has three phone numbers, one of which is used for sales made by the native plant nursery business and will be transferred to the Purchaser on [ ] early 201X. The two other phone numbers will be retained by the Vendor.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 38-235.

Reasons for decision

Summary

As the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise is not satisfied, the supply made by the Vendor to the Purchaser pursuant to the Contract is not a GST-free supply of a going concern.

Detailed reasoning

Requirements for a GST-free supply of a going concern:

Subsection 38-325(2) of the GST Act defines a supply of a going concern 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).

Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered and the supplier and recipient have agreed in writing that the supply is of a going concern.

Supply under an arrangement:

Subsection 38-325(2) of the GST Act refers to a 'supply under an arrangement' which satisfies the requirements in paragraphs 38-325(2)(a) and (b). Paragraph 19 of Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) provides that a 'supply under and arrangement' includes a supply under a single contact or supplies under multiple contracts which comprise a single arrangement.

In the present case we consider that the Contract and the document dated [ ] late 201X comprise a single arrangement and that there is a single supply under that arrangement.

Identified Enterprise:

Paragraphs 21 and 22 of GSTR 2002/5 provide that the conditions in paragraphs 38-325(2)(a) and (b) must be satisfied in relation to an 'identified enterprise' and refer to the definition of 'enterprise' in section 9-20 of the GST Act. That definition includes an activity, or series of activities, done in the form of a business.

Paragraph 29 of GSTR 2002/5 states:

29. Subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

Paragraphs 30 and 32 of GSTR 2002/5 accept that a part of a larger enterprise can be the 'identified enterprise' but only if the conduct of that part is itself an 'enterprise' as defined in section 9-20 of the GST Act:

30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

32. A supply of all the things necessary for the continued operation of an activity which is part of an enterprise cannot be a 'supply of a going concern' unless the conduct of the activity is itself an 'enterprise' as defined in section 9-20.

Paragraph 37 of GSTR 2002/5 sets out elements which are indicators that part of an enterprise is carried on in the form of a business (as required by the 'enterprise' definition):

37. The following elements are indicators that part of an enterprise may be carried on 'in the form of' a business:

● a degree of autonomy;

● a separate management structure;

● a system of internal user charging;

● a separate budget; and

● agreements with internal service providers or external customers.

In the present case the Contract refers to the 'sale of the nursery component of the larger business' and the Vendor explained that the Vendor also carries on (and will continue to carry on) the part of the Vendor's business comprising restoration of native bushland.

In our view the fact that the parties can agree to the sale of 'the nursery component of the larger business' in the Contract indicates that the native plant nursery part of the Vendor's business has a degree of autonomy. The use of a separate phone number and phone for the native plant nursery part of the Vendor's business also suggests a degree of autonomy.

Although the native plant nursery part of the Vendor's business does not appear to have a separate management structure, internal user charging or a separate budget, that may be due to the size of that part.

It is also clear from the Contract that the native plant nursery part involves a different structure and process, i.e. the acquisition or generation of Product 1, Product 2 and Product 3 which are then offered for sale to customers and involves agreements with service providers and external customers who would not interact with the restoration part of the Vendor's business.

We therefore consider that the native plant nursery part of the Vendor's business is itself an enterprise and is the 'identified enterprise' for the purposes of applying paragraphs 38-325(2)(a) and (b) of the GST Act.

Paragraph 38-325(2)(a):

Paragraph 38-325(2)(a) requires that the supplier supplies to the recipient all of the things necessary for the continued operation of the identified enterprise. 'Thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported. 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. 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.

In the present case the Vendor supplies to the Purchaser the inventory (on the basis that it is removed from the Vendor's premises by [ ] early-mid 201X), the phone number and phone relevant to the native plant nursery part of the Vendor's business, the current customer list, sales total by customer, supplier list and current stock list for advertising and transfers an employee to the Purchaser (provided the employee agrees). In addition the Vendor agrees to add a referral to the Purchaser to the Vendor's website from early 201X, email two referrals to the Purchaser to the Vendor's entire customer base and forward to the Purchaser any email inquiries received during a three month period commencing [ ] early 201X.

On the other hand, the Vendor does not supply to the Purchaser the business name' the premises at which the native plant nursery part of the Vendor's business is carried on or any equipment (e.g. tractors, trailers, and a computer which are available for use by the Purchaser only for as long as the inventory remains at the Vendor's premises).

Paragraph 91 of GSTR 2002/5 provides that where an enterprise is necessarily conducted from premises then suitable premises, or the right to occupy such premises must be supplied as one of the things that are necessary for the continued operation of the enterprise. Paragraph 91 states (in part):

Where premises are necessary for the continued conduct of the enterprise and premises are not supplied by the supplier because the recipient has, or is able to secure, suitable premises prior to the day of the supply, the supplier is not supplying a thing which is necessary for the continued operation of an enterprise.

Paragraphs 93 and 94 of GSTR 2002/5 set out an example:

Example 13: premises that are necessary

94. DeliCo conducts a delicatessen business from leased premises adjacent to a large grocery retailer within a suburban shopping mall. DeliCo negotiates the sale of the business to another registered entity, NewCo, which has its own premises from which it intends to operate the delicatessen. The contract provides that the business name, plant and equipment, stock and goodwill are to be supplied to NewCo. DeliCo retains its premises and intends to commence another business from these premises.

95. Because the delicatessen is conducted from premises within the mall, some premises are necessary for the conduct of the delicatessen business. The supply is not the 'supply of a going concern' as DeliCo is not supplying premises which are one of the things that is necessary for the continued operation of the supplier's enterprise

In the present case the nature and scale of the native plant nursery part of the Vendor's business (as indicated by the estimated retail value of the inventory stated in the Contract and fact that the Contract gives the Purchaser until [ ] early-mid 201X to remove the inventory from the Vendor's premises) indicates that premises are necessary for the continued conduct of that native plant nursery enterprise. The language of paragraph 91 of GSTR 2002/5 is mandatory and the fact that the Vendor is not supplying those premises to the Purchaser under the Contract means that paragraph 38-325(2)(a) of the GST Act is not satisfied.

As paragraph 38-325(2)(a) of the GST Act is not satisfied the supply made by the Vendor to the Purchaser pursuant to the Contract is not GST-free.