Private ruling: GST and supply of going concern
Date of advice: 23 September 2016
Published: November 2016
Ruling period: 1/07/20XX - 30/06/20YY

Ruling: Q1: Is the sale of the XX Hotel a supply of a GST-free going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.

Relevant facts and circumstances: You carried on an enterprise of a licensed hotel and accommodation provider trading as XX Hotel situated at X. On X you entered into a lease of the Hotel with Y (Landlord) for a term of X years commencing on X. The lease provided for X options for renewal each for a term of X years. On X an Administrator was appointed for your business. Z assessed the Hotel as part of the insurance cover obtained by the Administrator on X. The business was at the time in the process of being formally advertised for sale (an agent had been given instructions) and initial dialogue had begun with prospective buyers. A and B (Purchasers) offered to buy the Hotel business for $X exclusive of GST, consisting of $X of plant, equipment and fittings and $X of goodwill plus the value of stock up to a maximum stock value of $X exclusive of GST. There was verbal agreement between you, the Landlord and Purchasers that the Purchasers start renovating the Hotel after signing the Contract of Sale of Business (Contract) to ensure that once settlement occurred they could trade straight away. The Purchasers met with the Landlord before the offer was accepted and shared their vision for the Hotel with the Landlord. Once the Landord was comfortable with the temporary closure and the associated renovation and the Contract was signed, access was provided to the Purchasers to commence works on refurbishing the Hotel with a view to re-open the Hotel upon settlement. Page X of the Contract details the purchaser as "A, B and/or Nominee". The Nominee is X Pty Ltd which was registered for GST on X. On X the Landlord sent a letter to the Administrator confirming that the Landlord gives the Administrator permission to close the hotel from the time the contract is signed until settlement. On X the Administrator and the Purchasers signed the Contract carried on as 'Licensed Hotel and Accommodation Leasehold' under a general liquor licence in the Hotel. The Hotel ceased operations temporarily on this day. On X the Purchaser deposited $ X with agreement to pay the deposit balance amount of $ X within X days. On X an email was sent from the Purchasers to their lawyer informing that the Landlord is still waiting for an inspection of the Hotel's fire services system which is needed for insurance purposes. On X a quotation was submitted by C for plumbing to be repaired including sewerage blockages. On X the Purchasers paid the balance of the deposit - $ X. The Administrator was appointed as Liquidator. The existing lease for the Hotel between you and the Landlord expired. On X you renewed the Lease for the Hotel On X the Contract specified the date of settlement as X or such other date agreed in writing. The Liquidator and the Purchasers agreed to a new settlement. There was no specific written agreement to this effect however there was a common understanding between all parties concerned that the delays in liquor, food and accommodation license transfers and the negotiations in respect of defects identified by the Purchasers which they insisted to be the responsibility of the Vendor/Liquidator (and consequently sought settlement adjustments) meant that the original settlement date could not be met. X is the date of the Variation of the Lease to transfer the Lease to the Purchasers. The Purchasers signed the Variation of the Lease on X, the Liquidator on X and the Landlord on X. X is the Settlement date for the supply of the hotel business. The Variation of the Lease became effective making the Purchasers responsible for the rent from this date onwards. The period of the Hotel's temporary closure was from X to X.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 S ection 9-5 | A New Tax System (Goods and Services Tax) Act 1999 S ection 38-325

Reasons for decision: Summary: Taxable Supply Under section 9-5 of the GST Act, an entity makes a taxable supply if: • it makes a supply for consideration; and • the supply is in the course or furtherance of an enterprise that it carries on; and • the supply is connected with the indirect tax zone; and • the entity is 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. The supply satisfies the positive limbs of section 9-5 of the GST Act and raises the issue of whether the supply is a GST-free supply of a going concern. GST-free supply Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, the supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied as a going concern and the supply meets further requirements of subsection 38-325(1) of the GST act. The term 'supply of a going concern' is a statutory term which is defined for the purposes of Subdivision 38-J of the GST Act in subsection 38-325(2): (2) A supply of a going concern is a supply under an arrangement which: (a) the supplier supplies to the recipient all of the things 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). Further, for a supply of a going concern to be GST-free, subsection 38-325(1) of the GST Act has to be satisfied. It states: (1) 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 The supply will be a GST-free supply of a going concern where all of the requirements of section 38-325 of the GST Act are met. In this matter, paragraphs 38-325(1)(a) and 38-325(1)(c) of the GST Act are satisfied as the Hotel business sold for $ X and Clause 8.1 of the Contract provides that 'The parties agree that this contract is for the supply of a going concern'. However, regarding paragraph 38-325(1)(b), a search of our systems shows that the Purchasers were registered as a partnership for GST from X to X and have not been registered since that time to the present. No evidence has been put forward that the Purchasers were required to be registered for GST at the time of supply. Consequently, as all of the criteria in subsection 38-325(1) of the GST Act have not been met, subsection 38-325(2) of the GST Act does not have to be examined and the supply of the Hotel cannot be GST-free.