Private ruling: GST and supply of a going concern
Published: July 2012

Ruling: Q1: Are you making a GST-free supply of a going concern, within the meaning of subsection 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when you sell a division of your business (the division)? | A1: Yes.

Relevant facts and circumstances: You are an Australian enterprise. You are registered for GST. Your enterprise currently consists of five broad divisions. You intend to sell the part of the business (including assets) referred to as the division. The division involves the importation, distribution and sales of particular products (including those you develop and manufacture). Approximately 50% of the products are manufactured by you in your Australian facility (and will continue to be manufactured by you) with the remainder imported/acquired from elsewhere. You have provided the business sale agreement (the agreement). Under the agreement you have agreed to sell the business of distribution and sale of these products to customers. The consideration to be provided for the sale of the division is specified in the agreement. The agreement also specifies that the purchaser of the division is registered or required to be registered for GST. The division has its own separate management and operations teams. The operations of the division are delineated from other divisions along functional, products and customer profile lines. The division has authority for formulating its own budgets and strategies, and generates its own management accounts (including profit and loss statements) and the division has its own cost centre for accounting purposes. It is the division that enters into agreements with external customers for the supply of products. You will supply the purchaser with a right to occupy certain business premises on a shared basis pursuant to a licence to occupy. These premises are the premises from which the division is currently operated. You have agreed to manufacture and supply to the purchaser products relating to the division and will execute a manufacturing agreement (provided) to facilitate this. Under your sale agreement you will assign to the purchaser the benefit of relevant customer contracts. These contracts are set out in the sales agreement, and include agreements with sales agents, long-term supply agreements and all customer orders. Under the agreement, the purchaser must make employment offers (conditional on the completion of the sale) to each of your current employees as listed in the agreement. The agreement requires that both the purchaser and seller must do their best to procure acceptance of these employment offers. At completion of the sale the seller must release each transferring employee to the purchaser. You have agreed to sell the assets to the buyer, which includes inventory, trade debts, intellectual property rights, the contracts discussed above, business records and goodwill. You will retain all permits, licences, consents, approvals, authorisations, rights to use, registration, qualifications, orders or consents held by you. You hold a number of government-issued authorisations relevant to the industry, including licenses and permissions. You need to retain these authorisations to continue those parts of the enterprise that you will retain. Therefore it is inappropriate for you to surrender these authorisations. Also, these authorisations are personal to you and cannot be assigned. However, you will pass on the business processes and knowledge to assist the purchaser to obtain the necessary authorisations to continue to conduct the business. The agreement states that the seller and the buyer agree that the seller will carry on the business until the completion of the sale of the relevant part of the business. The agreement states that the seller and the buyer agree that the sale is a supply of a going concern for the purposes of section 38-325 of the GST Act. You have requested a ruling on whether your sale of this part of the business amounts to a GST-free supply of a going concern pursuant to section 38-325 of the GST Act.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

Reasons for decision: Summary: You are making a GST-free supply of a going concern pursuant to section 38-325 of the GST Act when you sell the division to the purchaser. | Detailed Reasoning - Detailed reasoning: You have agreed to sell a division of your business. This may be a taxable supply if the requirements of section 9-5 of the GST Act are met, or may be the supply of a GST-free going concern if the requirements of section 38-325 of the GST Act are met. You have provided information that indicates that, using the factors considered in paragraph 37 of Goods and Services Tax Ruling (GSTR) 2002/5, this part of your enterprise is carried on in the form of a separate business. It has factors including a degree of autonomy, a separate management structure, separate cost centres (a system of internal charging) separate budgets and enters into agreements with external customers in its own right. We accept that based on the information provided the division is a separately identifiable enterprise within your overall enterprise, and therefore the elements of section 38-325 of the GST Act will be considered in relation to this division of your larger enterprise. Under GSTR 2002/5, where the division 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 the division as an independent enterprise are supplied. You need to supply those things that are necessary for that division of the enterprise to continue to operate as an independent enterprise. A supply of a going concern is a supply under an arrangement where the supplier supplies to the recipient all the things that are necessary for the continued operation of the enterprise, and the supplier carries on, or will carry on, the enterprise until the day of the supply. For the supply of the going concern to be GST free the supply must be for consideration, the recipient must be registered or required to be registered, and the parties must have agreed in writing that the supply is of a going concern. | Detailed Reasoning - All things necessary for continued operation: We consider that you supply all of the things that are necessary for the continued operation of an enterprise when you supply those things which will put the recipient in a position to carry on the enterprise. You are supplying all the things that you are able to supply to the purchaser. In particular you supply a right to occupy certain business premises on a shared basis, an ongoing manufacture and supply agreement for the relevant products, the benefit of relevant customer contracts, opportunity and assistance to transfer relevant employees to the new operator and assets of the division including inventory, trade debts, intellectual property rights, the contracts discussed above, business records and goodwill. An essential element of the continuation of this enterprise is that the purchaser requires relevant authority (or authorities) to operate in the industry. We accept that authorisations are personal to you and cannot be re-assigned, therefore you are not able to assign your authority to operate in the industry. We also accept that, whilst acknowledging the comments in paragraph 50 of GSTR 2002/5 that we would normally expect surrender of such authority, in these circumstances it is not appropriate for you to surrender your authority as you are only transferring a part of your business for which this authority is necessary. In these circumstances, we consider that you are making all reasonable efforts to ensure that the recipient will be able to obtain the appropriate authorities to operate in the industry. You are not responsible for providing the authority to the purchaser, and the supply of this necessary element of the business must be made by a statutory authority. On the basis that you are providing assistance to the purchaser to obtain the necessary authorisations to continue to conduct the business, we assume that the authority will be issued by the relevant regulatory body, therefore as per paragraph 53 of GSTR 2002/5 we will treat the supply of that authority as having been supplied by you for the purposes of section 38-325 of the GST Act. Therefore, we consider that you will supply all of the things necessary for the continued operation of the enterprise. | Detailed Reasoning - Carry on enterprise until the day of supply: To make a supply of a going concern you must carry on the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by you). You have provided information that suggests that you will continue to carry on the enterprise of the division, and have agreed with the recipient that you will do so, until the time of the supply. We consider that this requirement of section 38-325 of the GST Act is satisfied on this basis. | Detailed Reasoning - Conclusion: As you and the buyer have agreed in writing that the supply is of a going concern, this meets the requirement that the supplier and recipient agree in writing that the supply is a going concern. You have advised that the recipient is registered or required to be registered, and that the supply is for consideration. Therefore, in the circumstances described, you will make a GST-free supply of a going concern when you supply the division to the purchaser.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.