Private ruling: GST and supply of a going concern
Published: December 2013

Ruling: Q1: Will your proposed supply to X under the Contract be treated as the GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes.

Relevant facts and circumstances: You source goods from various foreign suppliers and imports it into Australia in either its saleable finished form or as a partially processed product. You procure goods processing services from the Partnership. You procure storage from T. To that end you have entered into a long term agreement for the construction and use of a special purpose facility for the importation and storage of goods. You sell goods to companies and own the assets associated with the distribution enterprise. X will acquire: · all of the assets held by you in respect of the distribution enterprise, including supply agreements, customer lists and intangibles, as well as the goodwill attaching to this enterprise. You will continue to operate the distribution enterprise until the completion date. Completion is defined in the Contract as a day that is after the date on which certain conditions precedent are satisfied. Under the proposed acquisition, X will acquire all of the assets which are necessary for the continued operation of the distribution enterprise. It is the intention of the parties that X be supplied with all the necessary assets to be able to carry on the distribution enterprise, including: · customer lists; · the business records and systems; · the benefit of key contracts (novated or assigned as relevant); · the ongoing right to use the storage facility and customer contracts; · trading stock; and · goodwill All enterprise assets are to be sold to X free of any encumbrances. The parties have agreed in writing that the sale of the distribution enterprise is the supply of a going concern for the purposes of the GST Act. The purchase price payable by X for the distribution enterprise and an associated enterprise (to be sold by another entity) is agreed, plus or minus completion day adjustments. You are registered for GST.

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

Reasons for decision: Summary: Your proposed supply to X under the Contract will be treated as the GST-free supply of a going concern under section 38-325 of the GST Act. | Detailed Reasoning - Detailed reasoning: Under section 9-5, 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 Australia; 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 will satisfy the positive limbs of section 9-5 and raises the issue of whether the supply will be a GST-free supply of a going concern. | Detailed Reasoning - GST-free supply: The supply will be a GST-free supply of a going concern where the requirements of section 38-325 are met. Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 and when the 'supply of a going concern' is GST-free. For a supply to be a GST-free supply of a going concern under section 38-325: · the supply must be made 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 (paragraph 38-325(2)(a)); and · the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply (paragraph 38-325(2)(b)); · the supply must be for consideration (paragraph 38-325(1)(a)); · the recipient of the supply must be registered or required to be registered for GST (paragraph 38-325(1)(b)); and · the supplier and the recipient must have agreed in writing that the supply is of a going concern (paragraph 38-325(1)(c)). | Detailed Reasoning - Supply under an arrangement: The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made. (Refer to paragraphs 19 and 20 of GSTR 2002/5.) The Contract provides for the supply of the distribution enterprise and all that this entails (see below). In our view, the Contract constitutes an arrangement that satisfies the requirements of subsection 38-325(2). | Detailed Reasoning - Supplier supplies all things necessary for the continued operation of an enterprise: Paragraphs 38-325(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. You conduct the distribution enterprise. The enterprise is continuous and uninterrupted. This is the 'identified enterprise'. Where the enterprise is identified, a supplier needs to supply 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 30 of GSTR 2002/5). It is our view that all the things necessary for the continued operation of the distribution enterprise will be supplied under the arrangement. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be 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 (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier (refer to paragraph 161 of GSTR 2002/5). The day of supply occurs when you have done everything to satisfy your obligations under the Contract and X has assumed effective control and possession of the enterprise. Pursuant to the Contract, you warrant that it will continue to carry on the distribution enterprise until completion. It is our view that you will carry on this enterprise until the day of supply to X. | Detailed Reasoning - Supply for consideration: Paragraph 38-325(1)(a) requires that the supply is made for consideration. The consideration for the supply of the distribution enterprise and another entity's supply of its processing enterprise is a combined sum agreed and set out in the Contract. We consider that the supply will be made for consideration. | Detailed Reasoning - Recipient registered for GST: Paragraph 38-325(1)(b) requires that the recipient is registered or required to be registered for GST. X represents and warrants that it is registered for GST and you have provided evidence from The Australian Business Register of X's GST registration. We consider that this requirement will be met. | Detailed Reasoning - Agreed in writing: Under paragraph 38-325(1)(c), the supplier and the recipient must have agreed in writing that the supply is of a going concern. 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 is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5). The Contract sets out the conditions that must be met for the sale of the distribution enterprise to be affected. We consider that you and X agree in writing that the supply of the distribution enterprise will be the supply of a going concern. Taking all the above facts into consideration, it is agreed that the sale of the distribution enterprise by you to X will meet the requirements of a GST-free supply for the purposes of section 38-325 of the GST Act.