Edited version of private advice

Authorisation Number: 1051638441270

Date of advice: 25 February 2020

Ruling

Subject: GST and going concern

Question 1

Was the sale by Entity A of the Business Assets to Entity C in accordance with the Business Asset Sale Agreement a GST-free supply of a going concern pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Was the sale by Entity B of the Business Assets to Entity C in accordance with the Business Asset Sale Agreement a GST-free supply of a going concern pursuant to section 38-325 of the GST Act?

Answer

No.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A operated a construction business, and at the time of the sale:

a)    had four active client contracts

b)    an informal lease of plant and equipment from Entity B

c)    an informal lease of Business Premises from Entity B

d)    held the necessary Government registrations required to operate, and

e)    employed the employees of its business

f)     (the Entity A Business).

Entity B is registered for GST.

Entity B owned and leased to Entity A under informal agreements:

a)    all plant and equipment used in the Entity A Business, and

b)    the premises on which the Entity A Business was conducted (Business Premises)

c)    (the Entity B Business).

Entity A paid Entity B commercial rent for the Business Premises and a commercial hire charge for the plant and equipment. There were no formal agreements in place due to the commonality of their directors.

The directors of Entity A and Entity B are the same.

Entity A and Entity B agreed to sell some of the assets of the Entity A Business and Entity B Business to Entity C (the Purchaser) on terms set out in the Business Asset Sale Agreement dated ddmmyyyy (the Contract).

The Contract completed on ddmmyyyy (Completion Date). The sale price was $x (subject to adjustment).

Under the Contract:

·         Business Assets means all of the assets of Entity A and Entity B used in connection with the Business which are listed in the Schedule plus all Business IP (Intellectual Property Rights and Know How used in connection with the Business) and Inventory.

·         Excluded Assets means all assets of Entity A and Entity B which are not the Business Assets.

·         The conditions precedent included:

-       fully executed lease for the Business Premises on terms previously discussed and agreed by Entity B and the Purchaser

-       Government body consent to the transfer of the Registrations to the Purchaser

-       consent to the transfer of the Material Contracts to the Purchaser from each party to the Material Contracts

-       Key Personnel to execute an agreement for employment by the Purchaser.

·         The Business Assets, being assets used in connection with the business, sold to the Purchaser included:

1.   The following assets owned by Entity A:

-  the Material Contracts of the Entity A Business

-  Registrations held by Entity A

-  all inventory, intellectual property and business records used in the Entity A Business.

2.   Some of the plant and equipment used in the Entity A Business owned by Entity B as outlined in the Schedule.

·         Excluded Assets are to be removed from the Property within 30 days of Completion.

·         The sale was conditional on four named employees of the Entity A Business (Key Personnel), taking up employment with the Purchaser on the Completion Date.

·         The purchase price payable by the Purchaser to Entity A and Entity B was $x exclusive of GST, adjusted for the employee entitlements of the Key Personnel.

·         Entity A, Entity B, and the Purchaser agree to treat the supply of the Business Assets as the supply of a going concern.

·         Entity A and Entity B were obliged amongst other things to maintain the value of the Business Assets and carry on the Entity A Business and Entity B Business as a going concern.

Some of the plant and equipment was excluded from the sale and retained by Entity B including all trucks, excavators, vehicles and cranes used in the Entity A.

Entity A and Entity B carried on the Entity A Business and Entity B Business until the day of the supply (the Completion Date).

At the Completion Date the Purchaser:

·         was registered for GST

·         entered into a lease with Entity B with respect to the Business Premises commencing ddmmyyyy (with an execution date ddmmyyyy)

·         held the Registrations, as the Government body approved their transfer from Entity A to the Purchaser.

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

In this reasoning, please note:

·         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·         all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

You are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make a taxable supply if:

a)    you make the supply for consideration

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

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

d)    you are registered, or required to be registered for GST.

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

Entity A and Entity B have each made a supply of the Business Assets in Australia to the Purchaser for consideration in the course of their enterprises and were registered for GST. In addition there are no GST provisions whereby each supply would be input taxed. As paragraphs 9-5(a), (b), (c) and (d) are satisfied, each supply is taxable unless it is GST-free.

Subsection 38-325(1) provides that the supply of a going concern is GST-free if:

a)    the supply is for consideration

b)    the recipient is registered or required to be registered for GST, and

c)    the supplier and the recipient have agreed in writing that the supply is of a going concern.

Based on the facts supplied, the requirements of subsection 38-325(1) will be satisfied if there is a supply of a going concern.

Subsection 38-325(2) provides that 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 the larger enterprise carried on by the supplier).

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? explains at paragraph 19 that the term 'supply under an arrangement' includes a supply or supplies under a single contract or multiple contracts provided the things supplied relate to the 'identified enterprise' for paragraphs 38-325(2)(a) and (b).

Paragraph 20 of GSTR 2002/5 states:

The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.

In this case, the written agreement is contained in the Business Assets Sale Agreement which provides that Entity A, Entity B, and the Purchaser agree to treat the supply of the Business Assets as the supply of a going concern.

However, the supply of the Business Assets under the Business Assets Sale Agreement constitutes an arrangement under which supplies are made by two suppliers simultaneously:

1. Entity A's supply of the Business Assets of the Entity A Business to the Purchaser, and

2.    Entity B's supply of the Business Assets of the Entity B Business to the Purchaser.

Identified enterprise

Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). The identified enterprise must meet the requirements of subsection 38-325(2).

Of relevance, paragraphs 137 to 140 of GSTR 2002/5 consider the supply of two separate enterprises by two suppliers to one recipient and that in such cases each supply must be considered separately.

In this case there are two identified enterprises being supplied simultaneously under the single Business Asset Sale Agreement:

1. Entity A's enterprise of construction (the Entity A Business).
2. Entity B's enterprise of leasing the plant and equipment used in the Entity A Business to Entity A (part of the Entity B Business which also included the enterprise of leasing the Business Premises to Entity A).

Each supply must be considered separately.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 74 of GSTR 2002/5 states:

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.

Paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise:

·         the assets necessary for the continued operation of the enterprise

·         the operating structure and process of the enterprise.

It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise.

Entity A's supply

Entity A supplied the following to the Purchaser:

·         Material Contracts

·         the Registrations required to operate

·         all inventory, intellectual property and business records

In addition key personnel employed by Entity A were taken on by the Purchaser as a condition of the supply.

However, Entity A did not supply the plant and equipment used in the Entity A Business (owned by Entity B), or the informal lease of the Business Premises (owned by Entity B), being assets necessary for the continued operation of the noise barrier design and construction enterprise.

Under the Contract, Entity A has facilitated the entry by the Purchaser into a lease of the Business Premises with Entity B by the day of the supply. Similar to paragraphs 59 to 63 and Example 7 of GSTR 2002/5, Entity A is taken to have made a supply of the premises, even though the actual supply of the premises has been made by Entity B.

In some limited circumstances things necessary for the continued operation of an enterprise can be supplied by another party. Under the Contract, some of the plant and equipment which is necessary for the Entity A Business was supplied by Entity C to the Purchaser. However, plant and equipment including all trucks, excavators, vehicles and cranes used in the Entity A Business were excluded from the sale. As such Entity A has not ensured that all the plant and equipment necessary for the Entity A Business was supplied to the Purchaser.

In conclusion, Entity A has not supplied to the Purchaser all the things necessary for the continued operation of the Entity A Business being the plant and equipment used in the Entity A Business and therefore has not satisfied paragraph 38-325(2)(a).

Entity A's supply of the Entity A Business to the Purchaser was not a GST-free supply of going concern pursuant to section 38-325. Entity A has made a taxable supply pursuant to section 9-5.

Entity B's supply

The Entity B Business included the informal lease of the Business Premises and the informal lease of the plant and equipment to Entity A. Entity B will continue with its leasing of the Business Premises.

The relevant 'identified enterprise' is the leasing of plant and equipment. That is, Entity B's supply of plant and equipment to Entity A for a commercial hire charge. The things necessary for continued operation of the enterprise would be the plant and equipment and a lease agreement.

Example 9 in GSTR 2002/5 considers the situation of a leasing enterprise without a written lease agreement where the lease continues post sale:

Example 9: Leasing enterprise without written lease agreement

69. DiggerCo owns a parcel of land from which a car yard is operated by Beaut Cars Co (BCC). The two companies have common directors. BCC occupies the premises on a periodic basis with rent paid monthly in advance. Because of the commonality of directors, no formal lease agreement for occupation was ever entered into. BCC pays a commercial rate of rent on a monthly basis in advance.

70. RE Pty Ltd wishes to buy the property and will allow BCC to continue to occupy the premises under the same tenancy arrangements currently in existence. DiggerCo can supply the enterprise of leasing of this property to RE Pty Ltd as a going concern, provided the current periodic tenancy has not terminated and will continue.

Applying the principle from Example 9, unlike DiggerCo, when Entity B supplied the plant and equipment to the Purchaser, Entity A did not continue to hire the plant and equipment from the Purchaser, there was a termination of the hire agreement. Entity B has only supplied some the plant and equipment used in the Entity A Business to the Purchaser and has not supplied the hire agreement.

As outlined above, it is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise.

In Entity B's case all that was supplied were assets, being the plant and equipment.

In conclusion, Entity B has not supplied to the Purchaser all the things necessary for the continued operation of the Entity B Business and therefore did not satisfy paragraph 38-325(2)(a).

Entity B's supply of the Business Assets to the Purchaser was not a GST-free supply of going concern pursuant to section 38-325.

Entity B has made a taxable supply pursuant to section 9-5.