Private ruling: GST - sale of business
Date of advice: 19 March 2024
Published: 29 April 2024
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 19 March 20YY

Ruling: Q1: Will the sale of the processing business constitute a supply of a going concern in accordance with section 38-325? | A1: Yes. | Q2: Will the sale of both the properties as per the respective Land Sale Contracts, subject to a lease, constitute a supply of a going concern in accordance with section 38-325? | A2: Yes. | Q3: If, the properties are sold by Entity 2 to one or two separate, third party entities subject to a lease and a sub-lease, will the sale constitute as a supply of a going concern in accordance with section 38-325? | A3: Yes.

Relevant facts and circumstances: Entity A is purchasing a processing business from Entity 2. Entity 2 operates its processing business from the manufacturing facilities located at the properties. The sequence of the Business sale and purchase agreement (BSA) are: • Execution of the BSA between Entity 2 and Entity 1 for the sale of the processing business - on XXXX. • Execution of two lease agreements for the land and improvements of the Properties between Entity 2 as lessor and Entity 1 as lessee - at completion date. • Sale of processing business from Entity 2 to Entity 1 at completion date. Sale of the Properties (each subject to an existing lease with Entity 1 and a sub-lease with third party). As per the terms of the two sale of land contracts - one day after completion of the BSA. To complete this transaction, the following will be entered into: • Lease agreement for the land and improvements of the Properties. • Sub-lease agreement for the land and improvements of the Properties. • Contract for the sale of the Properties. • Existing agreement between Entity 2 and Entity 1. • Transitional Services Agreement between Entity 2 and Entity 1. Property contracts The land sell contracts have been drafted on the basis of a third-party purchaser for the Properties In the event that Entity 3 finds a purchaser, then that entity will acquire the properties at the time of completion of the contract of sale and assume the lease(s) over the site(s). Therefore, Entity 2 is making two (or possibly 3) supplies if there are two separate purchasers for the properties which are: • The sale of the processing business; and • The following day, the sale of the properties will take place. Agreements Agreements will remain in place and transfer at the date of completion. The parties to the contract of sale in relation to the sale of the processing business have agreed in writing that the supply will be of a going concern. Entity 2 will continue to carry on its processing business until completion. On the day on completion, Entity 2 will enter into a lease with Entity 1, and at the same time Entity 1 will enter into a sub-lease. This provided entity 1the right to occupy the properties in which the manufacturing will take place. Entity 2 will supply everything that is necessary for Entity 1 to take over the processing business from the date of completion on a turnkey basis. Entity 2 will supply the properties to a third-party purchaser with an existing lease in place to Entity 1, one day after completion of the BSA. Entity 2 will therefore be supplying the Properties as a supply of a going concern to a third party. All parties to the contracts of sale have agreed in writing that the sale of the Properties will be a supply of a going concern. The recipients of the supplies are registered for GST.

Relevant legislative provisions: A New Tax System (Goods and services Tax) Act 1999 subsection 38-325(1) | A New Tax System (Goods and services Tax) Act 1999 subsection 38-325(1)

Reasons for decision: Summary: Section 38-325 provides that, if certain conditions are satisfied, a 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 a GST-free supply if it is supplied under an arrangement for the supply to be a going concern. Section 38-325 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. (2). 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 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 being carried on by the supplier) All the above elements must be satisfied for the supply to be a GST-free sale of a going concern. | Detailed Reasoning - The following is applicable to all three questions.: This ruling will discuss the requirements, as detailed above, that are required to be met for both portions of the property to qualify as a GST-free supply of a going concern. Goods and Services Taxation Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) discusses the supply of a going concern for the purposes of section 38-325. Paragraph 29 of GSTR 2002/5 requires the identification of an enterprise that is being carried on by the supplier (the identified enterprise). This is the enterprise for which the supplier must supply all the things necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as a part of a larger enterprise. In this case, the enterprises being sold are: • the leasing enterprise consisting of the two commercial properties with leases in place; and • the processing business. Each enterprise can qualify as a GST-free supply of a going concern provided all the elements of 38-325 are met for each enterprise. | Detailed Reasoning - All things necessary: Paragraphs 72 and 73 of GSTR 2002/5 explain that the things that are 'necessary' for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A 'thing' is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the thing in the absence of the thing. Where the vendor's enterprise is one of leasing, they must be able to supply the leases (where current) as part of the contract of sale, as the leases are required in order to satisfy the 'all things necessary' provision. Where the vendor's enterprise is a processing enterprise, they must be able to satisfy the "all things necessary" provision in relation to this business. Paragraphs 74 and 75 of GSTR 2002/5 state: 74. That the supplier is required to supply to the recipient all of the things that are necessary to carry on the 'identified enterprise' so that the recipient is out in a position to carry on the enterprise if it chooses. 75. 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, equipment, stock-in-trade and tangible assets such as goodwill, contacts, 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. Paragraphs 131 to 135 of GSTR 2002/5 state that supply of parts of an existing enterprise to two or more recipients can qualify as a going concern. 131. Paragraph 38-325(2)(a) expressly recognises that the supply under the relevant arrangement of all of the things that are necessary for the continued operation of part of a larger enterprise that is capable of separate independent operation may be a 'supply of a going concern'. Therefore, there may be more than one 'supply of a going concern' when separately identifiable parts of a larger enterprise are supplied. 132. Where the owner of both a business enterprise and of the real property upon which the business enterprise is necessarily conducted sells the business enterprise to a second entity and the business premises to a third entity, the supply to the second entity will not be the 'supply of a going concern'. This is because the second entity has not been supplied with one of the things necessary for the continued operation of that enterprise, by the supplier, that is, the business premises. 133. Where the owner of both the business enterprise and the premises grants a lease of the premises in favour of the second entity by the day of the supply of the business enterprise to that second entity, the supplier is supplying the second entity with all of the things that are necessary for the continued operation of the enterprise. The requirement that the premises are supplied to the second entity is met even if the property is subsequently sold to a third entity subject to a lease. 134. Similarly, the supply of the real property to the third entity on a later day that is subject to a lease to a second entity in the circumstances described in the preceding paragraph, may also be the 'supply of a going concern'. This is because an enterprise of leasing the relevant property is conducted by the supplier up to the day of the supply, albeit for a brief period of time. The supplier, being the owner of both the business and the real property, is making two supplies, each of which is capable of being the 'supply of a going concern'. | Detailed Reasoning - Continued operation: Paragraph 149 of GSTR 2002/5 provides that the term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise. A supplier may carry on an enterprise to the day of the supply for the for the purposes of paragraph 38-325(2)(b) during the period of commencement or termination of an enterprise. | Detailed Reasoning - Agreed in writing: Paragraph 38-325(1)(c) states that the supplier and the recipient of the supply must have agreed in writing that the supply is of a going concern. Paragraphs 178 -179 & 181 - 185 of GSTR 2002/5 provides clarification on what agreed in writing entails. 178. One of the requirements of section 38-325 is that the supplier and the recipient have agreed in writing 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. This agreement need not form part of arrangement under which the supply of a going concern is made. 179. The GST Act, does not specify what form the agreement has to be in, nor does it define the term 'agreed in writing'. The term 'agreed' means 'to be in one mind; harmonise in opinion or feeling'. 181. 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 under an arrangement of everything necessary for the continued operation of an enterprise, is a supply of a going concern'. 182. The supplier and the recipient must agree that the supply is a 'supply of a going concern' on or before the day of the supply. 183. An agreement in writing by the parties that there is a 'supply of a going concern' will not conclusively determine that there is a supply of a going concern where the other elements of subdivision 38-J are not satisfied. ... 184. The supply of everything necessary for the continued operation of an enterprise to a recipient who is not registered or required to be registered will not be a GST-free supply, despite the terms of any agreement between the parties that the supply is a supply of a going concern'. 185. Where all of the things that are necessary for the continued operation of an enterprise are supplied to a registered recipient, but there is no agreement in writing between the parties, there will not be a GST-free 'supply of a going concern'. | Detailed Reasoning - Recipient required to be registered: Paragraph 38-325(1)(b) requires that the recipient of the supply of a going concern is registered or required to be registered for GST. Paragraph 186 of GSTR 2002/5 states that a recipient that is required to be registered in respect of the enterprise on and from the date of the supply, will satisfy the requirement in paragraph 38-325(1)(b). If the recipient is not required to be registered but chooses to register to obtain the benefit of the provision, the mere lodging of an application to be registered will not satisfy the requirements of paragraph 38-325(1)(b). The effective date of registration of the recipient must be on or before the day of supply. | Detailed Reasoning - Question 1: Based on the facts of this case, the provisions of subsection 38-325(1) are met in that the supply will be for consideration, the recipient of the supply will be registered for GST as at the date of settlement and the supplier and the purchaser have agreed in writing that the supply is of a going concern. It is now necessary to determine if all of the elements in subsection 38-325(2) are met. We will consider each portion of the property separately. Entity 2 is selling the processing business to Entity 1. As part of the contract of sale, Entity 2 will supply the business and the assets as a working processing business. | Detailed Reasoning - All things necessary and continued operation: The contract of sale details the assets provided as part of the processing business. In addition, agreements will be in place in relation to the raw product for the production of products. Entity 2 will continue the operation of the processing business up to the date of completion on the contract of sale. Therefore, all of the provisions of subsection 38-325(2) will be satisfied and, as a result, the sale of the processing business will qualify as a GST-free supply of a going concern in accordance with section 38-325. | Detailed Reasoning - Question 2 and Question 3: Based on the facts of this case, the provisions of subsection 38-325(1) are met in that the supply will be for consideration, the recipient of the supply will be registered for GST as at the date of settlement and the supplier and the purchaser have agreed in writing that the supply is of a going concern. It is now necessary to determine if all of the elements in subsection 38-325(2) are met. We will consider each portion of the property separately. | Detailed Reasoning - All things necessary and continued operation: As detailed in the land sale contracts, the sale of the leasing enterprise, consisting of the two properties will be completed the day after the completion date of the processing business. The contracts have been drafted on the basis that a third-party will purchase the leasing enterprise consisting of the two properties and the leases over the sites which will transfer from Entity 2 to the purchaser. Entity 2 will continue to carry on the leasing enterprise up to the date of completion of the contract of sale. Therefore, all of the provisions of subsection 38-325(2) will be satisfied in relation to both scenarios where either a third party purchases the leasing enterprise or Entity 3 purchases the leasing enterprise. Both will qualify as a GST-free supply of a going concern in accordance with section 38-325.