Edited version of private advice

Authorisation Number: 1052267181240

Date of advice: 3 July 2024

Ruling

Subject: GST - supply of going concern

Question

Will the supply of the accountancy practice known as XYZ be GST-free?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2025

The scheme commenced on:

XXYYZZZZ

Relevant facts and circumstances

References hereunder to

a)    the 'Business' are to XXX, which is the name of the enterprise being supplied;

b)    the 'Contract' are to the unsigned 25-page contract of sale known as 'CCC';

c)    the 'Vendor' are to the supplier of the enterprise, being YYY;

d)    the 'Purchaser' are to the recipient of the enterprise, being ZZZ; and to

e)    'you' are to you as the sole Principal of the Business.

YY is the legal owner of the accountancy practice trading as 'XXX' in its capacity as trustee of the YYY. On behalf of the trustee, you have negotiated the sale of the practice to another sole practitioner accountancy practice trading as 'ZZ'. A Contract has been prepared for this purpose.

We note the following aspects of the Contract:

a)    The Vendor wishes to sell, and the Purchaser wishes to purchase, the Business as a going concern.

b)    The Vendor and the Purchaser have agreed upon the terms and conditions pursuant to which the Purchaser will purchase the Business from the Vendor and those terms and conditions are set out in this Contract.

c)    The "Assets" means all of the assets used in the conduct of the Business, and includes:

                      i.        the Business Name;

                     ii.        the furniture;

                    iii.        the Goodwill;

                   iv.        the plant and equipment;

                     v.        the Vendor's Intellectual Property Rights;

                   vi.        the software licences; and

                  vii.        the Records.

d)    The "Business" means the tax/consultancy/accounting business or businesses conducted from the Premises under the Business Name and includes the Assets.

e)    The "Business Name" means XXX and includes any marks, designs or copyrights associated with the Business Name or otherwise with the Business which currently resides in the Vendor's name. "The vendor will obtain the business name XXX and transfer to the Purchaser and change the Vendor's company name.

f)     The "Clients" means the clients of the Business as will be identified in Schedule 1 to the Contract or as otherwise notified by the Vendor to the Purchaser in writing.

g)    The "Goodwill" means the Clients and the goodwill of the Vendor relating to the Business including the right for the Purchaser to represent itself as carrying on the Business as the successor of the Vendor.

h)    The "Premises" means the premises at PPP.

i)      The "Vendor Intellectual Property Rights" means all existing and future intellectual property rights the Vendor uses or needs to carry on the Business, and includes the trade marks, logos, service marks, trade names, copyrights, designs, patents, inventions, discoveries, processes, confidential information and other technical know-how and other rights in industrial property and applications for them and licence agreements or other arrangements under which a person has the right to use of the foregoing, whether registered or unregistered, and the right to make application for registration of the same.

j)      The Vendor agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor the Business on the terms and conditions contained in the Contract.

k)    The "Records" means all books and records which are (a) related to clients or (b) required for the proper conduct of the Business. The Vendor warrants to the Purchaser that the Records "represent a true and fair account of the financial history of the Business with any abnormal items properly treated.

l)      The Total Sale Figure of M for the sale and purchase of the Business is apportioned between Goodwill and Records as to 100% and plant, equipment and furniture as to 0%.

m)   The Vendor's Work in Progress (WIP) and Debtors will not be sold to the Purchaser. Arrangements will be in place for the billing by the Purchaser after the Completion Date of WIP as at the Completion Date.

n)    The Purchaser may, but is not required to, offer employees in the Business an offer to continue working in the Business after the Completion Date. Any offer of employment must be on the same terms of the current employment as at the Completion Date and must provide for continuity of all benefits and leave entitlements, including accrued leave. For this purpose, the Vendor must give the Purchaser details in writing of all entitlements as at the Completion Date of each Transferring Employee.

o)    The Vendor warrants to the Purchaser that there are no adverse conditions applying to any insurance policy held by the Vendor, and that any historical or pending professional negligence claims against the Vendor are disclosed in writing.

p)    The Vendor warrants to the Purchaser that none of the Assets will be encumbered in any way whatsoever at the Completion Date "unless otherwise provided" and that they are all in good working order and condition save for normal wear and tear.

q)    The Vendor must cause the following documents to be delivered to the Purchaser on or before the Completion Date:

                      i.        the ASIC "Consent to Transfer Number" for the Business Name;

                     ii.        any documents of transfer of any Assets prepared by the Purchaser and submitted to the Vendor which are necessary in the Purchaser's reasonable opinion, duly signed together with such documents of title as attach to each of the Assets;

                    iii.        any declarations or instruments prepared by the Purchaser and submitted to the Vendor which are necessary in the Purchaser's reasonable opinion to stamp any documents associated with the transaction at the Office of State Revenue; and such other documents as are reasonably required by the Purchaser for vesting in the Purchaser the full possession and benefit of the Business.

r)     The Vendor must transfer to the Purchaser the following things directly connected to the Business:

                      i.        the post office box

                     ii.        a mobile phone number

                    iii.        email addresses; and

                   iv.        any rights associated with domain name or website operated by the Vendor as part of or ancillary to the Business.

s)    The Vendor must make you available to the Purchaser as a consultant to the Business for up to 20 days spread over the first three months after the Completion Date free of charge.

t)     The Vendor and the Purchaser have agreed that the supply made pursuant to the Contract is the supply of a going concern "unless otherwise expressly stated therein".

The Premises constitutes your private home. It is not being supplied as part of the supply of the Business and no lease agreement will be entered into with the Purchaser. You have stated that 90% of your work is conducted via Zoom or phone call or you travel to see your clients.

Relevant legislative provisions

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

Reasons for decision

A supply will be GST-free if it satisfies the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This is known as the 'going concern concession'.

Firstly, the supply of the going concern needs to satisfy all three requirements of subsection 38-325(1), being:

a)    it must be for consideration;

b)    the recipient is registered for GST or is 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.

Secondly, for the supply of an enterprise to be GST-free pursuant to that provision, it must be a supply of a going concern, as defined by subsection 38-325(2). That is, it must be 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).

Each of the above requirements is discussed in turn below.

The supply must be for consideration

This requirement is satisfied by the fact the Vendor and the Purchaser of the supply have agreed on the price for the sale of the Business.

The recipient is registered for GST or is required to be registered

We have confirmed the Purchaser is registered for GST.

Agreement in writing

The requirement in subsection 38-325(1) that the parties must have agreed in writing that the supply is of a going concern is explained in paragraph 181 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):

[the] term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply, being the supply under an arrangement of everything necessary for the continued operation of an enterprise, is a 'supply of a going concern'.

In terms of timing, given the requirement is expressed in the past tense, the agreement must be in writing on or before the day of the supply (paragraph 182 of GSTR 2002/5). That factor goes straight to the issue of the intention of the supplier and the recipient when negotiating the sale and purchase.

You have submitted that Clause X of the Contract constitutes the required written agreement for the purposes of GST-free treatment under section 38-325. Clause X states:

Unless otherwise expressly stated herein the parties agree that the supply made pursuant to this Contract is the supply of a going concern under s. 38-325 of the "GST Act" which is GST-free.

As drafted, that clause is qualified. However, we note that the Contract does not actually contain any clause expressly stating otherwise. Moreover, we note that Recital X to the Contract states:

The Vendor wishes to sell, and the Purchaser wishes to purchase the Business as a going concern.

That is an unequivocal statement of fact as to the intention of the supplier and the recipient, and its place within the Contract will satisfy the subsection 38-325(1) requirement that the parties have agreed in writing that the supply is of a going concern. As a recital, the statement is not legally binding, however, It is a clear statement of intent and that is sufficient for the purposes of section 38-325.

In summary, we are of the view that the requirement in subsection 38-325(1) that the supplier and the recipient have agreed in writing that the supply is of a going concern will be satisfied, by virtue of either or both of Recital X or Clause X.

Supply under an arrangement

We accept that the Contract is evidence of an arrangement that has been negotiated in such a manner that the supply will be made in accordance with the terms of that arrangement.

The supplier supplies all of the things that are necessary

It will be a question of fact as to whether the Vendor will supply all of the things that are necessary for the continued operation of the Business. We discuss our views on this requirement at paragraphs 72, 73, and 75 of GSTR 2002/5, as follows:

[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'.... 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...... 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.

Having regard to the fact that the Premises are not being supplied as part of the supply of the Business, we have expressed the view in GSTR 2002/5 that:

[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. (Paragraph 92)

Having regard to the circumstances, it is our view that the supply of Premises at which the Business is currently carried on is not necessary for the continued operation of the Business.

In summary, we are of the view that the obligations placed upon the Vendor by the Contract are sufficient for us to agree that the Vendor will supply to the recipient all of the things that are necessary for the continued operation of the Business.

The supplier carries on the enterprise until it is supplied

The test of whether section 38-325 has been satisfied is determined at the time of supply. As such, for the supply to be GST-free, the outcome must be that the Vendor did in fact carry on the enterprise until the day of supply. As we state in GSTR 2002/5:

The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership. (Paragraph 41)

That is nothing more or less than the normally accepted parameters of a sale and purchase of a going concern, and we accept that the Contract evidences a clear intention to conduct the transaction in this manner. In particular, we note that, pursuant to Clause X of the Contract, the Vendor agrees "not to materially change the way in which the Business is conducted on or before the Completion Date" and agrees "in all respects, to carry on the Business in the usual way." In addition, we note that Clause X of the Contract provides that the Vendor must pay and discharge all debts and liabilities of the Business incurred before the Completion date and agrees to indemnify and keep indemnified the Purchaser with respect to all claims in relation to those debts and liabilities.

We are satisfied that this requirement will be satisfied.

Conclusion

In conclusion, we are of the view that all the requirements of s 38-325 for the supply of the Business to be a GST-free supply of a going concern will be satisfied.