Edited version of private advice

Authorisation Number: 1051621366382

Date of advice: 16 December 2019

Ruling

Subject: Goods and services tax (GST) and sale of fishing business

Question

Is entity X liable for GST on its sale of the fishing business under the sale agreement?

Answer

No.

Relevant facts and circumstances

Entity X is registered for GST.

Entity Y is registered for GST.

Entity X has entered into a sale agreement (the agreement) with Entity Y under which Entity X agreed to supply to Entity Y the following things used in Entity X's fishing business, which Entity X operated in a particular fishery.

·        the fishing vessel, and

·        the plant and equipment; and

·        the fishing licence

·        the vendor's interest in the marina berth for the vessel

The estimated completion date of the agreement is (date), being the settlement date.

The sale price is (price).

The parties have agreed to include within the conditions of the agreement the requirement for Entity X to secure the services of the long- time Master of the Vessel from completion of the sale contract to a subsequent date.The Master is experienced in fishing within the particular fishery and has specialised knowledge relating to the operation of the vessel (as each vessel within the fishery while generally having a similar visual appearance each has different characteristics and specific layout).

The agreement contemplates a proposed completion date which is an anticipated settlement date subject to the relevant authorities being contemporaneously co-ordinated to complete the transfer and issuance of the licence and vessel ownership documents at which time the parties will complete the settlement.

The licence is issued by the relevant authority pursuant to the relevant legislation. The fishery operates under a regime determined by lunar cycles and stock survey conducted by industry members and as such the fishing activity is generally limited to about (number) nights per year with the remainder of the time being applied to maintenance and repairs.

Entity X has operated the licence for many years. The general technique for catching the particular type of fish involved within the fishery is based upon the trawling of nets that travel along the seabed substrate channelling fish into the mouth of the nets and down to the end. The nets are periodically retrieved and the fish (and by-catch) then released onto sorting tables. The crew then sort the catch, throwing by-catch back overboard and the fish undergo a mechanical size assessment. The fish are then packed either cooked or uncooked into (number) kg boxes and snap frozen on board.

This enterprise does not require onshore storage facilities. The catch is picked up from the vessel upon its return from sea and immediately taken by delivery trucks to market or pre-arranged buyers.

Entity X will not have a signed deal with any fish wholesaler to assign to entity Y.

Entity X agreed to sell and Entity Y has agreed to buy the fishing Vessel (name of vessel) that vessel being endorsed upon the licence and therefore authorised to undertake fishing operations within the fishery. The vessel is and will be sold within survey as required to undertake fishing operations upon the licence and with all of the required electronics, refrigeration systems and other associated on board plant and equipment necessary to undertake fishing operations. This vessel has been endorsed upon the licence for a number of years and operated by Entity X for many years.

Further the parties have agreed that Entity X will supply additional plant and equipment (some of which are spares) relevant to the fishing operation as specified within the schedule to the agreement. Included in the plant and equipment to be supplied by Entity X to Entity Y is all of the gear required for fishing such as nets and trawl boards.

In addition, Entity X has agreed to assign its interest in marina berth at (location) referred to as (name) being the location at which the vessel is moored during periods of maintenance and repair.

Transfer of Licence

Under the relevant legislation, Entity X's fishing licence may be transferred to another entity, subject to certain requirements being met. The parties to the agreement will do all such necessary acts or things as may be necessary to obtain the consent of the relevant authority to the transfer of the vessel and licence prior to completion date. Similarly the transfer of the ownership of the vessel is undertaken by the relevant authority. The agreement is subject to the relevant authority approving the transfer of the vessel and licence to the purchaser at settlement.

Entity Y's existing fishing operations

Entity Y is currently a fisherman in a certain area (catching a different type of seafood to the fish that Entity X fished) and has existing buyers at a certain fish market and certain other buyers, who also buy the type of fish that Entity X fished.

Generally, Entity Y will have a couple of regular buying entities that they will negotiate with prior to or during each trip. Rarely are they contracted to sell to one buyer. More common is that they are negotiating with each of the wholesalers to see what price is being offered for different size product and then make a decision about who to sell to based upon price, payment timeframe, transport costs etc.

Vendor will carry on enterprise up to the time of sale

The carrying on of the vendor's (Entity X's) fishing enterprise will be facilitated by Entity X undertaking various repairs and maintenance of the vessel and gear up to the date of supply. These tasks are fundamental components of the enterprise as in this case the vessel can only actively operate within the fishery at certain times as determined by the relevant authority.

Entity X and Entity Y have agreed in writing that Entity X is supplying a going concern to Entity Y.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

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

Reasons for decision

Summary

GST is not payable on Entity X's sale of the fishing business under the agreement, as the sale will be a GST-free supply of a going concern.

Detailed reasoning

GST is payable on a taxable supply.

A supplier will make a taxable supply if all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a)   you make the supply for *consideration; and

(b)   the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c)   the supply is connected with the indirect tax zone; and

(d)   you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

The vendor in this case (Entity X) meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is:

• the vendor will supply various assets of their business to Entity Y for consideration (the price)(paragraph 9-5(a)); and

• the sale is made in the course or furtherance of the supplier's enterprise (paragraph 9-5(b)); and
• the sale is connected with Australia (paragraph 9-5(c) of the GST Act); and
• the supplier is registered for GST (paragraph 9-5(d) of the GST Act)

The sale of the business is not input taxed.

Therefore, what remains to be determined is whether the sale of the business is GST-free.

GST-free supplies of going concerns

A supply of a going concern is GST-free if it meets the requirements of subsection 38-325(1) of the GST Act.

Supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states:

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

Subsection 38-325(1) of the GST Act states:

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.

Paragraph 41 of GSTR 2002/5 explains the meaning of 'supplier supplies'. It states:

41. This term emphasises that the elements of paragraph 38-325(2)(a) must be satisfied from the perspective of the supplier. The ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.^[4#93; The meaning of 'all things necessary' is discussed in detail at paragraphs 72-89.

Therefore, the current arrangements Entity Y has with customers who buy its seafood are not relevant in determining whether the supplier of the business that is the subject of this ruling supplies the things necessary for that business.

Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 sets out the two elements that are essential for the continued operation of an enterprise. It states:

75. Two elements that 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.

Further, paragraph 150 of GSTR 2002/5 states:

150. A supplier is unable to supply all of the things that are necessary for the continued operation of an enterprise unless the relevant enterprise is not only being 'carried on', but is also operating. Where an enterprise engaged in an activity ceases to carry on that activity and the assets are in the course of being sold off, the enterprise is being 'carried on', but is not operating.

Paragraphs 122 to 126 of GSTR 2002/5 discuss staff. They state:

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.^[15#93; 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.

126. This transfer can be facilitated in a number of different ways. For example, the employee may enter into a new contract of employment with the recipient, either on an ongoing basis or for a limited period of time only, which would be sufficient to train another person to perform the relevant tasks. Alternatively, the supplier may arrange to have the employee prepare a set of instruction/training manuals which are to be provided to the recipient upon transfer of the enterprise that will enable another person to perform the duties of the key employee. Where the enterprise cannot continue to operate without the particular employee's skills and knowledge, the supplier has not supplied all of the things that are necessary for the continued operation of the enterprise.

Entity X will supply the following things to Entity Y, which are necessary for the continued operation of Entity X's fishing enterprise:

• the fishing boat
• the plant and equipment
• the licence, by way of transfer
• the vendor's interest in the marina berth, by way of assignment of this interest
• skills and knowledge of a key personnel, that is, the Master

Additionally, Entity X will be doing maintenance and repair work on the boat and gear in the period leading up to the time of sale, which we consider is part of the operation of Entity X's fishing business.

Therefore, the vendor will supply to the purchaser all of the things necessary for the continued operation of the vendor's fishing enterprise. Hence, the requirement of paragraph 38-325(2)(a) of the GST Act is met.

The vendor will carry on the enterprise up to the date of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met.

As the requirements of subsection 38-325(2) of the GST Act are met, Entity X will supply a going concern to Entity Y.

Additionally:

• the supply is for consideration,
• the recipient is registered for GST, and
• the supplier and the recipient have agreed in writing that the supply is of a going concern.

Therefore, Entity X will make a GST-free supply of a going concern under section 38-325 of the GST Act. Hence, GST will not be payable on the sale of the items identified in the agreement.