Edited version of private advice

Authorisation Number: 1052217205393

Date of advice: 31 January 2024

Ruling

Subject: GST - sale of a going concern

Question

Is the supply of a Rent Roll business by you to the Purchaser a 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, the supply will be of a going concern under section 38-325 of the GST Act and therefore be considered GST-free.

This ruling applies for the following period:

1 July 20YY to 30 June 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

You own business A.

You have been registered for GST effective xxxx. The Purchaser has been registered for GST effective xxxx.

You license your operation of the business A to a related party (Operator).

You and the Operator are members of the same income tax consolidated group

The Operator is responsible for the day to day running of the business A, including employment of staff.

You have entered into a Term Sheet with the Purchaser for the sale of xxxx business A.

You then entered into a Contract for Sale which was signed by both You and the Purchaser on xxxx.

In addition to this sale, You have over the past three months, sold off numerous parcels of business A to other parties who are unrelated to the purchaser in this instance. That is, You are not selling your entire business A portfolio to any one purchaser.

You and the Purchaser have agreed in writing in the Term Sheet, and agreed in the Contract for Sale when it was signed on xxxx, that the supply will be that of a going concern for GST purposes.

The Contract for Sale notes the following inclusions:

•         Employees;

•         Business records;

•         Plant and equipment (as per the annexed schedule)

The Purchaser may choose which employees, if any, it wishes to retain from the Operator. Employees which the Purchases wishes to retain will be released from employment by the Operator.

The draft Contract for Sale does not include the following:

•        Premises;

•        Computers or IT Hardware;

•        Software;

•        Franchise agreement;

•        Business name;

•        Website;

•        Domain and email addresses:

•        Telephone numbers

It is noted that the reference to Franchise Agreement in the Contract for Sale should instead be a reference to License Agreement, as there is no Franchise Agreement in this case.

The Contract for Sale requires that the business A continues to be operated up to and including the date at which the Contract for Sale settles, which is expected to be on xxxx.

You (or the Operator) will provide a written notice to each business A property owner to advise them of the sale and seeking a new Management Agreement and Authority in favour of the purchaser on the same terms as enjoyed by You.

At least five business days prior to settlement, You will provide the Purchaser with a list of property managements which have new Management Agreements and Authorities, which includes the following details:

•         Each management address;

•         Monthly rent;

•         Monthly management fees;

•         Annualised management fees.

Upon settlement, You must provide the Purchaser with:

•         Operational control of business A;

•         All authorities and Management Agreements;

•         Full and complete access to the business records;

•         Evidence of the release of any security interests;

•         In relation to each Management:

o        all available current lease/tenancy agreement, application form, tenant ID, etc;

o        any current tenancy breach notices;

o        record of any funds held by the Vendor on behalf of an Owner or tenant

o        a reconciliation of its trust account, adjusted for any outstanding cheques or deposits or fees and transfer the balance of the trust account to the Purchaser's trust account;

o        all duplicate's keys remote control devices, and access/alarm codes in the Vendor's possession;

o        all duly signed documents which are required to be provided to the office of the Licensing Authority and/or the Bonds Office to notify of the change in managing agent;

o        lists of outstanding maintenance obligations

o        if available, copies of building insurance and landlord protection insurance policies;

o        if available all instructions books and warranties for fixtures, fittings, and chattels held by the Vendor;

o        all available current property condition and inventory reports together with all supporting photographs;

o        preferred contractor lists specified by any Owner;

o        lists of all ongoing service and maintenance arrangements (such as pool cleaning, lawn mowing, garden bags, insurance) and contact details for these service providers;

o        all pending tenancy applications

o        all inspection reports together will all supporting photographs for current tenants;

o        the tenant ledgers that reflect transactions arising out of or in relation to the Rent Roll;

o        details of any arrears (including the calculations behind the stated arrears) of such rentals or other moneys;

•         Access to any other document reasonably required by the Purchaser and executed by You where necessary; and

•         Full and unrestricted possession of all the business assets which form part of the Contract for Sale.

The Contract for Sale requires that You will use its best endeavours to ensure that all existing property owners which are managed by the Operator will continue to do business with the Operator until the settlement date and will transfer to the Purchaser under the new Management Agreements and Authorities.

The Purchaser does not require the Operator's existing premises, due to already having their own premises from which they operate their existing real estate business.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

Reasons for decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Under section 9-5, you make a taxable supply if:

•         you make the supply for consideration; and

•         the supply is made in the course or furtherance of an enterprise that you carry on; and

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

•         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.

* denotes a defined term under section 195-1.

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

•         The supply is for consideration; and

•         The recipient is registered or required to be registered; and

•         The supplier and the recipient have agreed in writing that the supply is of a going concern

All of the requirements under subsection 38-325(1) of the GST Act will be met as the supply will be for consideration, the Purchaser is registered for GST and You and the Purchaser have agreed in writing that the supply is of a going concern

Subsection 38-325(2) of the GST Act notes that a supply of a going concern is a supply under an arrangement under which:

•         The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

•         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)

Enterprise

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)).

Section 195-1 states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

Paragraph 30 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) states:

30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Therefore, if the part of the rent roll business that is being provided is enough to form an independent enterprise for the Purchaser, then the supply will be of a going concern as long as all of the things that necessary for the continued operation of the independent enterprise are provided as part of the sale.

Paragraphs 72, 74- 75 and 80 of GSTR 2002/5 relevantly provide:

All of the things that are necessary for the continued operation of an enterprise

72. The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

...

74. 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.

75. Two elements 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.

...

80. The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Paragraph 92 of GSTR 2002/5 states:

92. In limited circumstances, an enterprise may not need to operate from premises and therefore premises are not one of the things necessary for the continued operation of that enterprise. This is the case where an enterprise requires few tangible assets, for example, a personal fitness trainer who visits clients and does not need any premises to operate the enterprise.

The Contract of Sale includes employees, business records and plant and equipment. It doesn't include however include premises, computers or IT hardware, software, franchise agreement, business name, website, domain and email addresses and telephone numbers.

It is considered therefore that the inclusion of employees, business records and plant and equipment in the Contract of Sale will be all things that are necessary for the Purchaser to continue the enterprise. This would mean that both limbs under subsection 38-325(2) of the GST Act will be satisfied.

We therefore consider the supply of the business A by you to the Purchaser to be considered a GST-free supply of a going concern under section 38-325 of the GST Act.