Edited version of your written advice

Authorisation Number: 1051184155914

Date of advice: 25 January 2017

Ruling

Subject: Going Concern

Question 1

Is the supply of the business a supply of a going concern under section 38-325 of the GST Act?

Answer

Yes, the supply of the business will be a supply of a going concern.

Relevant facts and circumstances

You are registered for GST.

The purchaser is registered for GST.

You wished to divest part of your business and the purchaser wished to acquire this business. To this end you and the purchaser entered into a Memorandum of Understanding ("MOU"). In this MOU, you both agreed to exclusively explore and negotiate terms whereby the purchaser would acquire all your rights, title and interests in the Agreements, with you to then provide some ongoing services to the purchaser.

The Business is described in the Sale and Purchase of Assets Agreement.

Upon a review of the Agreements it was determined that there were restrictive clauses which prevented them from simply being assigned or novated by you to the purchaser. While the intention remained that the purchaser would acquire the relationships within the business, there needed to be transitional arrangements in respect of the sale and purchase of the assets of the business.

The agreed solution was that you would consent to the early termination of existing agreements and that new replacement agreements would be entered into as soon as practicable after the date of completion of the sale. From the date of completion of the sale you would pay the net revenue it received from the Agreement to the purchaser for this transitional period. As you wished to divest yourself of functions from the date of completion, for this transitional period you would subcontract customer support, telecommunications and sale functions to the purchaser for no consideration.

The Assets sold by you are described to be:

(a) Your Net Revenue to be derived from the existing Agreements and contracts;

(b) Your rights in two telephone numbers;

(c) an irrevocable licence to use Intellectual Property as defined; and

(d) Your Trade Marks used in the Business.

You and the purchaser have agreed that the supply or supplies made by you through the Transaction are under an arrangement for the supply of a going concern and are GST-free pursuant to section 38-325 of the GST Act.

Two of the Conditions for Completion specified in the Agreement are the parties entering into the Transition Deed and the Services Agreement.

The Transition Deed governs the arrangements between the parties in respect of the existing contracts during the period before they are migrated to new agreements.

The transitional period is only intended to be a temporary arrangement until all contracts have migrated to be the purchaser's contracts. The purchaser is incentivised to migrate contracts onto new agreements quickly, by being subjected to additional fees from a specified date in 20ZZ for any existing contracts not migrated by that time.

Relevant legislative provisions

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

Reasons for decision

Is the supply a GST-free supply of a going concern?

Subsection 38-325(1) provides:

(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.

Applying the requirements of subsection 38-325(1) to your circumstances:

● under the arrangement, you are selling the business;

● our records show that the purchaser is registered for GST; and

● at the time of entering into the arrangement, the parties agreed in writing that the supply is of a going concern.

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:

(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 part of a larger enterprise carried on by the supplier).

Goods and Services Tax Ruling 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.

Paragraph 19 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free states:

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.

Therefore, an entity may supply a going concern under more than one contract provided that all of the contracts are part of the one arrangement.

While there are a number of contracts/agreements that have been entered into by the parties, they are all for the purpose of completing the sale of the business from you to the purchaser.

As the current Agreements prevented a simple assignment or novation to the purchaser, we need to consider whether you are still supplying all things necessary for the continued operation of the enterprise.

Goods and Services Tax Ruling GSTR 2002/5 states:

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 benefits 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.

49. Because the relevant thing which is incapable of assignment is necessary for the continued operation of an enterprise, it is arguable that the supplier is unable to supply one of the necessary things. A narrow or technical construction of the term 'supplier supplies' leads to a conclusion in these circumstances that the supplier would not have supplied a thing which is necessary where the thing has in fact been supplied to the recipient by a third party.

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.

51. Where the relevant thing is the rights under an existing contract, the surrender of those rights, in circumstances where the third party has committed to enter into a contract under which substantially similar rights will be created in favour of the recipient, will satisfy the requirement that the relevant thing is supplied.

53. 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 the following limited circumstances:

(a)   the thing must be 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; or

(b)   […]

To satisfy this requirement, you and the purchaser entered in a Transition Deed. During the Transition Period:

(a) the Contracts between each customer and you will continue on foot until the entry into a new agreement with the purchaser;

(b) the purchaser will provide Support Services as your subcontractor, at no cost to you;

(c) the purchaser may provide services to the customers;

(d) you will provide reasonable ongoing assistance in facilitating the purchaser entering into new agreements; and

(e) you must pay to the purchaser the Net Revenue earned in respect of the Contracts until such time as each Contract expires or is terminated.

Consequently, despite the Agreements being under a legal impediment, you have made all reasonable efforts to surrender its rights and facilitate the movement of its current customers into new agreements with the purchaser via the Transition Deed.

Therefore, as you will continue to operate the business until the day of supply, all of the requirements of Subdivision 38-J of the GST Act are met and the supply will be a GST-free supply of a going concern.