Edited version of private advice

Authorisation Number: 1051563732904

Date of advice: 13 August 2019

Ruling

Subject: GST-free sale of a going concern.

Question

Is the sale of the 'Business Assets', as detailed under the Sale Agreement', a GST-free sale 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 registered for GST.

·        You sold the business assets as detailed in the Sale Agreement.

·        You are the owner of the land, buildings and any improvements on the land together referred to as 'the property'.

·        You have leased or licenced parts of the property to various independent third parties.

·        You own the business which is operated and managed by a third party pursuant to various agreements.

·        The various leases in respect of the external retail spaces are managed by a third party as the manager under a property management agreement with you.

·        You have entered into a single sales agreement with the business purchaser where the business purchaser will purchase the 'Business Assets' and the Property Purchaser will purchase the 'Property Assets'.

·        Pursuant to the Sales Agreement

˗        The vendor agrees to sell to the business purchaser and the business purchaser agrees to purchase the business assets on the completion date free from security interests and in accordance with the terms of this agreement for the purchase price.

·        Pursuant to the Sales Agreement:

˗        The business purchaser must purchase all stock at midnight on the date of completion at a price equal to the stock amount.

·        The business assets to be provided are in accordance the Sales agreement.

·        You and the Business Purchaser have entered into a lease in respect of the premises whereby the Business Purchaser will lease the premises from you commencing from the Completion Date (Lease Agreement).

·        Pursuant to the Lease Agreement the Lease will begin one day prior to the completion of the sale and purchase of the Property Assets and will remain in force as at completion of the sale and purchase of the Property Assets.

·        Until the completion of the sale and purchase of the Business Assets, you must ensure that the Manager manages and conducts the business in an efficient manner and as a going concern in accordance with normal and prudent business practice and in the ordinary course of the business.

·        Until the completion of the sale and purchase of the Business Assets, you must use reasonable endeavours to provide assistance and access for the Business Purchaser to the premises to observe the conduct of the business and to examine the various books and records.

·        The Business Purchaser will procure employment offers to employees of the business within a reasonable time after the date of the Sale Agreement.

·        Under the Sales Agreement, you and the Business Purchaser agree that:

˗        The supply of the business assets are a GST-free supply of a going concern in accordance with section 38-325 of the GST Act;

·        The Business Purchaser must be registered for GST under the GST Act as at Completion and agrees to provide evidence of its GST registration (satisfactory to you) prior to Completion.

·        The Business Purchaser is registered for GST and will continue to be registered as at the date of completion of the sale and purchase of the Business Assets.

·        You will carry on the enterprise of the Business Assets respectively until the day of the supply of the enterprise.

Relevant legislative provisions

A New Tax System (Goods and Services Tax Act) 1999

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)

Reasons for decision

Section 38-325 of the 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 a GST-free supply 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).

All of these elements must be satisfied in order for the supply to be a GST-free sale of a going concern.

Based on the facts provided, the three elements in subsection 38-325(1) of the GST Act are satisfied at the time that the supply is made. That is, the supply of the Business Assets was for consideration, both you and the Business Purchaser were registered for GST at the time of the supply and you and the Business Purchaser agreed in writing that the supply of the Business Assets was a supply of a going concern.

Next, consideration needs to be given on whether the requirements of subsection 38-325(2) of the GST Act are satisfied.

Goods and Services Tax Ruling, Goods and services tax: when is a supply of a going concern' GST-Free? (GSTR 2002/5) discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and explains when the supply of a going concern is GST-free.

Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. 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.

The supply of the Business Assets, as detailed under the Sales agreement included ongoing lease agreements.

Paragraph 131 of GSTR 2002/5 states that paragraph 38-325(2)(a) expressly recognises that the supply under the relevant arrangement of all of the things that are necessary for the continued operation of part of a larger enterprise that is capable of separate independent operation may be a 'supply of a going concern'. Therefore, there may be more than one 'supply of a going concern' when separately identifiable parts of a larger enterprise are supplied. In your case you are making separate sales of Business Assets and Property Assets which include the actual property from which the business is operated.

Paragraph 132 of GSTR 2002/5 provides that:

Where the owner of both a business enterprise and of the real property upon which the business enterprise is necessarily conducted sells the business enterprise to a second entity and the business premises to a third entity, the supply to the second entity will not be the 'supply of a going concern'. This is because the second entity has not been supplied with one of the things necessary for the continued operation of that enterprise, by the supplier, that is, the business premises.

In your circumstances, you as the owner of both the Business Assets and the real property where the business (Property Assets) is conducted, you are making a sale of those to two different entities. However, pursuant the Sales Agreement, you and the Business Purchaser have entered into a lease in respect of the premises whereby Business Purchaser will lease the premises from you commencing from the Completion Date (Lease Agreement). Pursuant to the Lease Agreement the Lease will begin one day prior to the completion of the sale and purchase of the Property Assets and will remain in force as at completion of the sale and purchase of the Property.

GSTR 2002/5 at paragraph 133 confirms that where the owner of both the business enterprise and the premises grants a lease of the premises in favour of the entity purchasing the business enterprise by the day of the supply of the business enterprise to that entity, the supplier is supplying that entity with all of the things that are necessary for the continued operation of the enterprise. The requirement that the premises are supplied to the entity that is purchasing the Business Assets is met even if the property is subsequently sold to a third entity (in this case Property purchaser) subject to a lease.

As a result, the supply of the Business Assets, as detailed under the Sales agreement, meets the requirements of subsection 38-325(2) of the GST Act.

As requirements of both subsection 38-325(1) and (2) of the GST Act are satisfied your sale of Business Assets is a GST-free sale of a going concern.