Private ruling: GST and going concern
Date of advice: 31 March 2021
Published: May 2021

Ruling: Q1: Will Entity A's supply of the Property under the Contract for the sale and purchase of land (Land Contract) to the Property Purchaser and the Business and Assets under the Agreement For Sale of Business (Business Contract) to the Business Purchaser, be GST free supplies pursuant to section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 )? Answer Yes.

Relevant facts and circumstances: Entity A owns a property located in Australia (the Property). Entity A is registered for GST and operates a hotel, (the Business) from the Property. Entity A is selling the Property and the Business to two separate purchasers. The Property will be sold to the Property Purchaser and the Business will be sold to the Business Purchaser. Entity A will enter into a Lease Agreement (the Lease) with the Business Purchaser prior to completion of the sale of the Property. The Property Purchaser and the Business Purchaser are members of a GST group of which Entity C is the GST group representative. Entity C, the Property Purchaser and the Business Purchaser are registered for GST. Land Contract On ddmmyyyy Entity A entered into the Contract for the sale and purchase of land (the Land Contract) with the Property Purchaser for $X. A copy of the Land Contract has been provided. The Property is being sold subject to an existing tenancy being the signed Lease between Entity A and the Business Purchaser which will be entered into prior to settlement. The Land Contract provides that Entity A and the Land Purchaser agree the sale of the Property is a supply of a going concern and Entity A will carry on the enterprise until the day of the supply. The transfer of the liquor licence has been provisionally approved and will be finalised by completion. A copy of an unsigned Lease Agreement (the Lease) is attached to the Land Contract. Business Contract On ddmmyyy Entity A entered into the Agreement for Sale of Business ( the Business Contract) with the Business Purchaser for $X. A copy of the Business Contract has been provided. Clause X provides that completion of the Business Contract is conditional upon provisional transfer of the liquor licence to the Land Purchaser. Clause X2 provides that Entity A and the Business Purchaser agree that the Land Contract and Business Contract are interdependent and a failure to complete either one will see the other cancelled. The Business Contract provides that Entity A and the Business Purchaser agree, that the supply of the Business and the Assets under the Business Contract is a supply of a going concern under an arrangement pursuant to which the Entity A is suppling all of the things necessary for the continued operation of an enterprise and will continue to carry on the enterprise until the day of the supply to the Business Purchaser.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act 1999 Section 38-325 | A New Tax System (Goods and Services) Tax Act 1999 Section 195-1

Reasons for decision: Summary: In this reasoning, please note: • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the Australian Taxation Office (ATO) website ato.gov.au Entity A is making two separate supplies to two separate purchasers: 1. Under the Land Contract, Entity A will supply the Property with an existing tenant (the Business Purchaser) to the Property Purchaser. 2. Under the Business Contract, Entity A will supply the Business and Assets to the Business Purchaser. We will examine whether these two supplies meet the requirements of section 38-325. Subsection 38-325(1) provides that the supply of a going concern is GST-free if: • the supply is for consideration • the recipient is registered or required to be registered for GST, and • the supplier and the recipient have agreed in writing that the supply is of a going concern. Entity A's supply of the Property under the Land Contract will satisfy the requirements of subsection 38-325(1) if there is a supply of a going concern in that: • Entity A will receive consideration • the Land Purchaser will be registered for GST at the time of settlement, and • Entity A and the Land Purchaser agreed in writing that the supply is a supply of a going concern under the Land Contract. Entity A's supply of the Business under the Business Contract will satisfy the requirements of subsection 38-325(1) if there is a supply of a going concern in that: • Entity A will receive consideration • the Business Purchaser will be registered for GST at the time of settlement, and • Entity A and the Business Purchaser agreed in writing that the supply is a supply of a going concern under the Business Contract. Subsection 38-325(2) provides that 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 a part of the larger enterprise carried on by the supplier). | Detailed Reasoning - Supply under an arrangement: Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a supply of a going concern GST-free? explains at paragraph 19 that the term 'supply under an arrangement' includes a supply or supplies under a single contract or multiple contracts provided the things supplied relate to the 'identified enterprise' for paragraphs 38-325(2)(a) and (b). Paragraph 20 of GSTR 2002/5 states: The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', 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. Entity A is supplying the Property subject to a lease pursuant to the Land Contract which constitute a supply under an arrangement. Entity A is supplying the Business and Assets pursuant to the Business Contract. The Business Contract sets out that the employees, license and agreements relevant to the operations of the Business and provides mechanisms to be transferred and therefore constitutes a supply under an arrangement. Therefore, the two supplies under these documents constitutes a supply under an arrangement. | 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). | Detailed Reasoning - The Property - Leasing enterprise: At settlement the Property subject to a Lease will be supplied. The lease of the Property (leasing enterprise) is the identified enterprise for the purposes of paragraph 38-325(2)(a) under the Land Contract | Detailed Reasoning - The Business - Hotel operation: At settlement the Business and Assets will be supplied. The Hotel operation (Business) is the identified enterprise for the purposes of paragraph 38-325(2)(a) under the Business Contract. | Detailed Reasoning - All things necessary: Paragraphs 74 and 75 of GSTR 2002/5 state: 74. 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 put 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 and equipment, stock-in-trade and intangible assets such as goodwill, contracts, 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. | Detailed Reasoning - The Property - Leasing enterprise: We consider that the things necessary to carry on the leasing enterprise include both the Property and assignment of the Lease. Under the Land contract Entity A is supplying the Property together with the lease to the Land Purchaser and therefore Entity A will supply all things necessary for the leasing enterprise to continue. | Detailed Reasoning - The Business - Hotel operation: The Business is defined in the Business Contract. The Business Contract outlines the Assets used in the Business. Clause X of the Business Contract provides that Entity A will supply the Business and the Assets to the Business Purchaser. In addition, Entity A is supplying the Business Purchaser (as Tenant of the Property under the Land Contract) with the Property via the Lease. Therefore, we consider Entity A will supply all things necessary for the hotel operation to continue. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: As set out in the clause X of the Land Contract and clause X of the Business Contract both enterprises are continuing until the day of the supply. Therefore, each respective supply under the Land Contract and Business Contract will satisfy the requirements of section 38-325(2). Further, paragraphs 135 and 136 of GSTR 2002/5 provide an example which is similar to Entity A's proposed GST-free supplies: Example 21: One supplier and two recipients 135. Smithers Pty Ltd (Smithers) operates a bookshop enterprise from premises that it owns. It decides to sell the bookshop enterprise. The purchaser, Bookworm Pty Ltd (Bookworm), for financial reasons does not want to purchase the freehold. Smithers agrees to sell the bookshop enterprise and enters into an agreement to lease the premises to Bookworm. The day of supply is to be 30 August. Assuming all other requirements of subdivision 38-J are satisfied, Smithers is making a GST-free 'supply of a going concern', provided that the property is supplied with the lease intact. 136. Landmark Pty Ltd (Landmark) is a separate legal entity, although its directors and shareholders are also directors and shareholders of Bookworm. Landmark enters into an agreement with Smithers to acquire the building. The day of supply will be 31 August. Smithers supplies the building to Landmark with the lease intact. For the purposes of section 38-325, we will accept that Smithers has carried on an enterprise of leasing, albeit for only a day, and can therefore make a GST-free supply of a going concern, when it supplies the leasing enterprise. | Detailed Reasoning - Conclusion: As Entity A will meet the requirements of section 38-325 for both the supply of the Property and the supply of the Business, each supply will be a GST-free supply of a going concern.