Private ruling: GST and sale of a going concern
Date of advice: 31 May 2018
Published: August 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 June 20XX

Ruling: Q1: Are you making 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)? | A1: Yes

Relevant facts and circumstances: You are registered for GST and carry on an enterprise of providing internet advertising services for customers wanting to buy and sell specified items (the Business). You were approached by a Buyer to acquire the Business. The Buyer drafted a Heads of Agreement (HoA) to acquire the Business. You entered into an Agreement (Contract) dated xx/xx/xxxx with the Buyer for the sale of the Business together with specified assets. The Contract was completed on xx/xx/xxxx (Completion Date). The ‘Business’ is defined in the Contract: ‘ The businesses of online advertisement services ("XXXX"), "xxxx showroom" services, social media services, hosting websites, and all other web and hosted services carried on by the Seller at the Effective Time. ’ The Contract provides that the Purchase Price is $X comprising payments of $X and a further payment of $Y. The Buyer is registered for GST effective from xx/xx/xxxx. The HoA states that the Business is to be sold as a going concern. The Contract states: The Seller has agreed to sell and transfer, and the Buyer has agreed to buy, the business (together with the Assets) as a going concern on, and subject to, the terms and conditions of this agreement.’ The term ‘Assets’ is defined as ‘ the property, rights and assets of the Business described …’. The Contract states: ‘2.1 On the terms of this agreement and, with effect from the Effective Time, the Seller shall sell, and the Buyer (with a view to carrying on the Business as a going concern) shall buy, the Assets with full title guarantee and free from all Encumbrances.’ The Contract continues stating the ‘ Excluded Items are excluded from the sale under this agreement .’ The term ‘Excluded Items’ is defined as ‘ the assets, rights and liabilities described in xxxx which are to be excluded from the sale pursuant to this agreement’ . The Contract lists the following Assets: n The Goodwill n The Business Names n The benefit (subject to the burden) of the Business Contracts n The Business Intellectual Property including the Registered Intellectual Property n The Business Software, Domain Names, Websites, and Social Media Platforms n The Records n The Business Claims n The Acquired Receivables n The Advanced Receipts n The IT Systems The Contract lists the following Excluded Items: n The Excluded Liabilities n Any right of action to which the Seller may be entitled (whether in contract, tort or otherwise) other than pursuant to or in connection with any Business Contract or Business Intellectual Property n All contracts and arrangements relating to the Business other than the Business Contracts n All the Seller's cash-in-hand or at the bank or at any other financial institution other than the Advance Receipts n The Book Debts n The Seller's accounts and accounting records which do not relate exclusively to the Business n The Seller's interest in any real property n Any Stock n The Moveable Assets n Any other asset, property or rights of the Seller relating to or connected with or belonging to or required or intended for use in the Business other than the Assets The term ‘Business Contracts’ referred to in the Contract is defined as ‘ the Customer Contracts, Supplier Contracts, IT Contracts, Outgoing Licenses and Incoming Licences ’. The following terms are also defined in the Contract: Customer Contracts: the contracts, engagements or orders entered into by or on behalf of the Seller with Customers details of which are set out in Schedule X or which the Buyer otherwise agrees in writing is a Customer Contract Supplier Contracts: the contracts, engagements or orders entered into by or on behalf of the Seller for the supply or sale of goods or services to the Seller details of which are set out in Schedule X IT Contracts: the agreements, arrangements or licences relating to the Business Software or the IT Services (including all licences of Software in each case owned or used by the Seller in connection with the Business) or other information technology procurement details of which are set out in X Outgoing Licences all licences granted by the Seller in connection with the Business and which are listed in X, but excluding the Incoming Licenses and Excluded Licenses Incoming Licences all licences granted to the Seller in connection with the Business Intellectual Property and which are listed in X, but which exclude the Outgoing Licenses and Excluded Licenses The term ‘Records’ referred to is defined as: ‘the books, accounts (excluding the GST Records and returns), lists of clients, Customers and suppliers (including the Customer Database), credit reports, price lists, cost records, work tickets, catalogues, advertising and all the other documents, papers and records, however stored, of the Seller relating to the Business or any of the Assets’ ‘Customer Database’ is defined as: ‘the database owned by the Seller for the purpose of providing products and/or services to the Customers and which shall be provided to Buyer in excel spreadsheet format and which shall include the following information: (a) company/customer name (b) name of the invoice recipient (c) street address (d) postal address (e) email address (f) phone number (g) sale amount for customer (rate)’ The Contract states the following: 11. Employees 11.1 The Seller shall terminate the employment of the Employees immediately prior to the Effective Time. The Seller shall be responsible for all obligations with respect to any severance, separation or termination pay, notice period and similar obligations arising by Law or under a contract of employment from the termination or transfer of employment of any Employee. 11.2 The Buyer shall offer employment to the Employees from the Effective Time on reasonably comparable terms in the aggregate and as otherwise required by Law. The Contract details restrictions placed on you (the Seller) and the sole Director and shareholder of the Seller being collectively referred to as the ‘Covenantors’. The restrictions placed on the Covenantors include that for specified periods relating to specific geographical areas (Restricted Area) the Covenantors shall not either directly or indirectly: n carry on any business, be employed or engaged in any manner whatsoever in any business carried on or be interested economically or otherwise in any manner whatsoever in any business carried on in any part of the Restricted Area which is in competition with any part or the whole of the Business as carried on at any time during the period of 12 months immediately preceding the Completion Date n seek the custom of any Restricted Customer for the purpose of providing that Restricted Customer with Restricted Items n deal with any Restricted Customer for the purpose of providing that Restricted Customer with Restricted Items n seek the custom of any Potential Customer for the purpose of providing that Potential Customer with Restricted Items n deal with any Potential Customer for the purpose of providing that Potential Customer with Restricted Items n solicit or attempt to entice away from the Business any Restricted Employee n employ, offer to employ or enter into a contract for the services of any Restricted Employee n knowingly interfere or seek to interfere with the contractual or other trade relations between the Business and any of its suppliers. The consideration for the Covenants is included in the Purchase Price. You carried on the Business until the date of the sale.

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: Summary: Note: In this reasoning, unless otherwise stated, n all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) n reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Subsection 38-325(2) provides that for GST purposes, 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 part of a 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? provides guidance on the application of the going concern provisions for GST purposes. | Detailed Reasoning - 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). In this case, given the facts provided we consider the subject of the transaction is the business of providing online advertisement services, showroom services, social media services, hosting websites, and other web and hosted services in respect to the buying and selling of specified items (the identified enterprise). | Detailed Reasoning - Supply of all things necessary for the continued operation of an enterprise: Paragraph 72 of GSTR 2002/5 states in part that 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. Paragraph 73 of GSTR 2002/5 continues stating that 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. There are two elements identified in paragraph 75 of GSTR 2002/5 as being essential for the continued operation of an enterprise: n 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 n 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. On the issue of a supply of an operating structure and processes, paragraphs 78 to 80 state the following: 78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied. 79. In New Zealand, courts and tribunals have had regard to such factors as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, the introduction to existing clients and the continuity of marketing arrangements to the time of supply in determining whether operating structure and process has been supplied. These indicia are provided by way of example only and do not comprise an exhaustive list of relevant factors. The relevance of any particular factor would depend on the nature of the enterprise in question; a particular factor may not be present in each and every case where a ‘supply of a going concern’ is made. 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. In regard to a supply of goodwill, paragraphs 110 and 111 provide that goodwill is intangible property and attaches to a business. Goodwill cannot attach to an enterprise which is not a business. As such, if the ‘identified enterprise’ is a business, goodwill is supplied as one of the things that is necessary for the continued operation of that enterprise. Paragraph 115 of GSTR 2002/5 discusses that some arrangements for the supply of a business may include restrictive covenants. Where a restrictive covenant is supplied as part of an arrangement, it is one of those things that is necessary for the continued operation of an enterprise. Paragraph 116 of GSTR 2002/5 states that where intellectual property exists and is one of the things that is necessary for the continued operation of the enterprise which is the subject of the arrangement, the benefit of the intellectual property must be supplied to the recipient under the arrangement. On the issue of staff, paragraphs 122 to 124 discuss that the services of employees are necessary for the operation of many enterprises. However, for GST purposes, employees are not ‘things’ and therefore are not of themselves ‘things that are necessary for the continued operation of an enterprise’. 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 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. Given the facts of this case together with the issues discussed above in regard to goodwill, restrictive covenants and staff, we consider that under the arrangement (Contract) you will providing ‘all things necessary’ for the Buyer to carry on the continued operation of the Business. Furthermore, you carried on the Business until the day of the supply (Completion Date). Therefore, the requirements of subsection 38-325(2) have been satisfied. | Detailed Reasoning - GST-free supply of a going concern: Subsection 38-325(1) provides that the sale of a going concern will be GST-free if: n the supply is for consideration; and n the recipient is registered or required to be registered; and n the supplier and the recipient have agreed in writing that the supply is of a going concern. In this case you made the supply for consideration and the recipient (Buyer) is registered for GST. Furthermore the Contract contains agreement that the supplier (Seller) has agreed to sell and transfer, and the recipient (Buyer) has agreed to buy, the business (together with the Assets) as a going concern. As such, the criteria of subsection 38-325(1) have been satisfied. | Detailed Reasoning - Conclusion: Your supply is a supply of a GST-free going concern pursuant to section 38-325 of the GST Act.