Edited version of private advice

Authorisation Number: 1051177626506

Date of advice: 12 January 2017

Ruling

Subject: GST and the sale of a going concern

Question 1

Is your supply of the Hotel to Entity C, including land and improvements situated at the specified address, 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

Yes.

Relevant facts and circumstances

You are the registered proprietor of land described in folio identifier ... and improvements thereon situated at a specified address (the Property). You operate a hotel trading under a registered business name (the Hotel) on the Property.

You have occupied and operated the Hotel as a going concern since acquiring it pursuant to a contract dated ...

Pursuant to a Deed of Option dated ..., you, as the Grantor, granted to Entity A, as Grantee, an option to acquire the Hotel. Entity A did not exercise the option.

Subsequently, pursuant to a Deed of Option dated ... (Second Option Deed), you, as Grantor, granted to Entity B, as Grantee, an option to acquire the Hotel.

On a specified date, you varied the Second Option Deed at the request of Entity B. The variation resulted in you agreeing to increase the number of gaming machines and gaming machine entitlements to be supplied at completion under one of the conditions of a Contract for the sale of land (Sale Contract) which was to be entered into by the parties as a consequence of Entity B exercising the option.

On a specified date, you were in the manner prescribed in the Second Option Deed, served with the following documents:

• a 'Nomination Notice', pursuant to which Entity B nominated Entity C as its nominee to exercise the option to acquire the Hotel as granted pursuant to the Second Option Deed;
• an 'Acceptance' notice, pursuant to which Entity C confirmed its acceptance of Entity B's nomination; and
• an 'Option Exercise Notice', pursuant to which Entity C served notice on you of the exercise of the option to acquire the Hotel as granted by you pursuant to the Second Option Deed.

Pursuant to the Second Option Deed, upon exercise of the option, you and Entity C have exchanged contracts dated ... for the sale and acquisition of the Hotel subject to the terms and conditions as set out in the Sale Contract (a copy of which has been submitted to us for the purpose of this ruling). Relevantly, the Sale Contract provides that:

• the Property comprises the land in folio identifier ... together with the benefit of the commercial premises comprising a hotel trading under a specified name and style;
• the sale is not a taxable supply but is a GST-free supply because it is the supply of a going concern under section 38-325;
• a specified subclause requires you to carry on the enterprise conducted on the land in a proper and business-like way until completion;
• pursuant to a specified condition, you are required to transfer the registered business name for the Hotel;
• pursuant to a specified condition, you are required to supply the poker machine entitlements and gaming machines used in the operation of the Hotel;
• pursuant to a specified condition, you are required to transfer the hoteliers licence issued in respect of the Hotel thereby constituting the property licenced premises within the meaning of the Liquor Act in your State;
• pursuant to a specified clause, the parties agree that the sale of the Property under the contract is a GST-free sale of a going concern within the meaning of Subdivision 38J of the GST Act;
• pursuant to a specified clause, Entity C acknowledges that you will be terminating all of your employees at completion and you will be entitled to remove all plant and stock unless otherwise agreed with Entity C prior to completion.

You have also advised that included in the sale are items as listed in a document annexed to the Sale Contact and headed '...Inventory' identifying all necessary plant, equipment, fittings and chattels required to continue operating the licenced hotel.

Attached to the Sale Contract is Planning Certificate Number. ... issued by the Council.

Entity C is registered for GST.

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

In these reasons for decision;

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and
• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

Summary

On the facts submitted to us all the requirements of section 38-325 are met and accordingly, the supply of the Hotel, including the Property, under the contractual terms agreed to by the parties, is a GST-free supply of a going concern.

Detailed reasoning

The term 'supply of a going concern' is a statutory term which is defined for the purposes of Subdivision 38-J in subsection 38-325(2):

(2) A supply of a going concern is a supply under an arrangement under which:

1. the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and
2. 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).

In your case, you have continuously occupied and operated the Hotel as a going concern since acquiring it. Pursuant to the Sale Contract, at completion, in addition to supplying the land, you are also transferring to Entity C:

• the registered business name for the Hotel;
• the poker machine entitlements and gaming machines used in the operation of the Hotel;
• the hoteliers licence issued in respect of the Hotel;
• all necessary plant, equipment, fittings and chattels required to continue operating the licenced hotel.

We note that under a specified condition of the Sale Contract, you will be terminating all of your employees at completion. The ATO view regarding whether employees are necessary for the continued operation of an enterprise for the purposes of 38-325(2) is discussed at paragraphs 122 to 130 of GST Ruling, GSTR 2002/5, Goods and services tax: when is the supply of a going concern' GST-free? Paragraphs 122 to 125 of GSTR 2002/5 are reproduced below:

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.

123. However, continuity of employment of the existing workforce is not an entirely irrelevant consideration in determining whether there is a 'supply of a going concern'. The fact that the employment of existing employees has been terminated prior to the day of supply is a relevant consideration, but not necessarily a decisive one, in determining whether the enterprise in question has continued to operate until the day of supply.

124. Further, the continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient. However, as the recipient of a 'supply of a going concern' may choose not to carry on the enterprise after the day of supply, a recipient need not take on the existing workforce in order to establish that the necessary operating structure and process has been acquired. Whether the operating structure and process has been supplied in any given case is always a question of fact and degree to be determined in the light of all relevant circumstances.

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 your case, the arrangement does not contemplate the necessity for any key employee in carrying on the enterprise of operating the Hotel. While the licensee will not be transferred, pursuant to a specified condition of the Sale Contract, you are required to facilitate the transfer of the license to Entity C's appointed licensee. Therefore, in line with the explanations at the above mentioned paragraphs from GSTR 2002/5, the supply of the services of the existing employees of the Hotel is not a thing necessary for the continued operation of that Hotel.

Applying the ATO view as provided in GSTR 2002/5 to your case, we consider that under the arrangement between the parties, at completion of the Sale Contract, in addition to the land, you will also be supplying to Entity C the operating structure and processes of the enterprise of operating the Hotel. Accordingly, you are supplying all the things necessary for the continued operation of that enterprise in accordance with paragraph 38-325(2)(a).

Furthermore, as required under a specified subclause of the Sale Contract, you will be operating the Hotel until completion.

For the above reasons, we consider that the supply made by you under the arrangement is a supply of a going concern under subsection 38-325(2) and this supply is GST-free if all the requirements of subsection 38-325(1) are satisfied.

Subsection 38-325(1) provides:

(1) The *supply of a going concern is GST-free if:

1. the supply is for *consideration; and
2. the *recipient is *registered or *required to be registered; and
3. the supplier and the recipient have agreed in writing that the supply is of a going concern.

Applying the requirements of subsection 38-325(1) to your circumstances, we find that:

• under the arrangement, you are selling the Property for $...;
• Entity C is registered for GST; and
• the parties have agreed in writing that the supply is of a going concern by ticking the relevant box (GST-free because the sale is the supply of a going concern under section 38-325) on page 1 of the Sale Contract.

It follows from the above analysis that all the requirements of section 38-325 are met and accordingly your sale of the Hotel to Entity C, including the Property, is a GST-free supply of a going concern.