Private ruling: Supply of a going concern
Published: July 2012

Ruling: Q1: Is the supply made by XS Ltd to Y Ltd ('Buyer') pursuant to the Agreement and relevant GST Side Agreement a 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, the supply made by XS Ltd to Buyer pursuant to the Agreement and relevant GST Side Agreement is a GST-free supply of a going concern under section 38-325 of the GST Act. | Q2: Is the supply made by XM Ltd to Buyer pursuant to the Agreement and relevant GST Side Agreement a GST-free supply of a going concern under section 38-325 of the GST Act? | A2: Yes, the supply made by XM Ltd to Buyer pursuant to the Agreement and relevant GST Side Agreement is a GST-free supply of a going concern under section 38-325 of the GST Act. | Q3: Is the supply made by XU Ltd to Buyer pursuant to the Agreement and relevant GST Side Agreement a GST-free supply of a going concern under section 38-325 of the GST Act? | A3: Yes, the supply made by XU Ltd to Buyer pursuant to the Agreement and relevant GST Side Agreement is a GST-free supply of a going concern under section 38-325 of the GST Act. | Q4: Is Buyer entitled to claim input tax credits ('ITCs') in respect of the acquisitions to be made by Buyer from XS Ltd, XM Ltd and XU Ltd pursuant to the Agreement? | A4: No, Buyer is not entitled to claim ITCs in respect of the acquisitions to be made by Buyer from XS Ltd, XM Ltd and XU Ltd pursuant to the Agreement.

Relevant facts and circumstances: Background: Buyer has agreed to purchase the assets associated with X Inc's equipment distribution business in the Territories pursuant to the Transation agreements. Transaction Agreements: The sale to and purchase by Buyer is recorded in the Agreement which has a number of Exhibits annexed to it plus a Disclosure Schedule which contains a number of other Schedules. In addition there are three GST Side Agreements between each of XS Ltd, XM Ltd and XU Ltd and Buyer. The Agreement: The Agreement recites that Buyer desires to purchase and the Sellers desire to sell, and cause certain of their Affiliates to sell certain assets related to the equipment distribution business conducted by the X Entities in the Territories. The Agreement lists a certain number of entities, including XS Ltd, XM Ltd and XU Ltd as Sellers. Each Seller agrees to sell, assign, transfer and convey to Buyer all of the Sellers' and Seller Parties' (defined as certain Affiliates) right, title and interest in and to the 'Acquired Assets'. The Agreement states that Buyer is acquiring only the Acquired Assets and not the 'Excluded Assets'. Acquired Assets is defined to mean the raw materials, finished goods, spare parts and acquired WIP inventories of the Sellers which are used in or held for use in the Local Business, 'Acquired Equipment', 'Assumed Contracts' (defined to include all agreements for the provision of goods or services to Sellers, all leases etc. relating to the Local Business, all agreements, contracts or orders for the sale of products, parts or service to any customer of Sellers), real property leased or owned by Sellers with respect to the Local Business, the 'Other Assets' (defined as other assets used by the Sellers in the Local Business (i.e. the inventories and equipment of the Sellers used in or held for use in the Local Business), and the 'Acquired Other Current Assets' (e.g. prepaid rent, insurance and other expenses and other current assets of the Sellers). The Excluded Assets include 'Excluded Inventory' (e.g. customer owned equipment that is in the process of being rebuilt, inventory owned by H entities, equipment belonging to a specified business of any X Entities), 'Excluded Equipment' (e.g. servers and core infrastructure equipment owned or leased by the Sellers, equipment related to a specified business of any X Entities, certain 'Excluded Equipment', 'Excluded Contracts' (e.g. contracts with H entities, contracts relating to a specified business of any of the Sellers or the X Entities), and 'Other Excluded Assets' (e.g. all intellectual property of the Sellers and three facilities located in Australia) The Agreement sets out a 'Base Purchase Price' for the Acquired Assets, adjusted for inventory count and any indemnification of Buyer which will be paid at Closing and then adjusted following a count of Acquired Inventories and preparation of a statement of 'Closing Net Working Capital' (which takes into account the inventory account and accrued and unused employee entitlements). There is a preliminary allocation of the Purchase Price between the Sellers (including XS Ltd, XM Ltd and XU Ltd in the Disclosure Schedule. The Agreement sets out certain representations and warranties by the Sellers and the Buyer. The Agreement deals with taxes, including GST, and states that to the extent that the supply of all or part of the Acquired Assets involves the supply by a Seller or Seller Party of an enterprise for GST purposes the Parties agree that that supply is a supply of a separately identified enterprise under an arrangement: · under which the relevant Seller or Seller Party is supplying all of the things that are necessary for the continued operation of an enterprise; · under which the relevant Seller or Seller Party will continue to carry on the enterprise until Closing; · under which the relevant Seller or Seller Party will separately agree by GST Side Agreement that the supply is a supply of a going concern; and · which is GST-free as the supply of a going concern. Buyer warrants that Buyer is GST registered. The Agreement obliges the relevant Seller or Seller Party and Buyer to apply for a joint GST private ruling that the supply of all or some of the acquired Assets by the relevant Seller or Seller Party to Buyer is the supply of a going concern. The Agreement contains a number of covenants, including covenants related to the conduct of business (e.g. each Seller covenants to conduct the Acquired Assets only in the ordinary course of the Local Business until Closing), covenants by the Parties to satisfy certain conditions, covenants by the Sellers to give Buyer access to information and employees between the date of the Agreement and closing, and covenants by Sellers to obtain written consents from the counterparties to Assumed Contracts. Buyer is obliged to make an offer of employment to the employees of X entities specified in a Schedule. The Sellers and Buyer agree to work together so that, effective as of Closing, Buyer shall be the beneficiary of the rights and responsible for the obligations under any 'Shared Contract' listed in the Agreement, except that where any Shared Contract cannot be so modified, it will be either assigned to the Buyer or retained by the relevant Seller at closing. GST Side Agreements: The GST Side Agreement between XS Ltd and Buyer is in the form of a letter to Buyer which records that those parties agree that the supply of the Acquired Assets by XS Ltd to Buyer is the supply of a going concern and that the GST clauses in the Agreement apply to and are incorporated into the GST Side Agreement. The GST Side Agreement has been executed on behalf of XS Ltd and Buyer. There are similar executed GST Side Agreements between XM Ltd and Buyer and XU Ltd and Buyer. Submissions: It was submitted, in relation to subsection 38-325(1) of the GST Act, that the supply under the Agreement is for consideration (i.e. the Base Purchase Price, subject to adjustments), that the recipient (i.e. Buyer) is GST registered, and that the supplier and recipient have agreed in writing that the supply is of a going concern (because, pursuant to the Agreement and each GST Side Letter each Seller has agreed with Buyer that the supply is a supply of a going concern). For the purposes of subsection 38-325(2) and the statement in Goods and Services Tax Ruling GSTR 2002/5 (Para 21) that the requirements of subsection 38-325(2) have to be satisfied in relation to an 'identified enterprise' it was submitted that each Seller had an identified enterprise of 'distribution and support of equipment'. In terms of the discussion in GSTR 2002/5 (Para 37) of indicators which suggest that part of an enterprise can be carried on in the form of a business, it was submitted that each Seller carried on a separate identifiable enterprise because the business carried on by each Seller had a degree of autonomy from other X Entities, a separate management structure, a separate budget, and separate agreements with service providers and external customers. In relation to the requirement in paragraph 38-325(2)(a) that the supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise, it was submitted that the Sellers will supply to Buyer both the assets necessary for the continued operation of the enterprise and the operating structure and process of the enterprise. Reference was made to the agreement to supply all rights, title and interest in the Acquired Assets, the definition of 'Acquired Assets', and the agreement to divide Shared Contracts. It was stated that, as required by GSTR 2002/5 (Para 36), all Shared Contracts that are essential for the continued operation of each Seller's respective enterprise will be supplied to the Buyer. It was stated that, per GSTR 2002/5 (Paras 72-3), the Excluded Assets are not necessary for the continued operation of the identified enterprise and (per GSTR 2002/5, Para 83) the Excluded Assets are used by each Seller as a matter of choice. It was acknowledged that certain premises were included in the Excluded Assets, but that the Agreement allows Buyer to use these premises for 6 months after Closing. It was submitted that GSTR 2002/5 (Paras 124-5) supports the view that the supply of the Acquired Assets and the Assumed Contracts plus the offer of employment to employees under the Agreement means that Buyer is acquiring the operating structure and process. In relation to paragraph 38-325(2)(a) it was also submitted that the ATO accepts in GSTR 2002/5 that it is not uncommon for the assets of a corporate group to be held and supplied by separate corporate entities and in such a case (Para 137) where two entities sell their enterprise to one recipient and the contracts are interdependent, each supply must be considered separately. It was submitted that the supplies made by each of XS Ltd, XM Ltd, and XU Ltd independently meet the requirements of a supply of separate identifiable enterprises and satisfy paragraph 38-325(2)(a) of the GST Act. It was submitted that the requirement in paragraph 38-325(2)(b) that the supplier will carry on the enterprise until the day of supply was satisfied by the Agreement. Further information: In response to a request from the ATO the applicants' advisor provided further information concerning the activities carried on by XS Ltd, XM Ltd and XU Ltd as follows: · XS Ltd carries on business designing, manufacturing, erecting and assembling certain equipment and supplies replacement parts for certain equipment.. · XM Ltd acquired a division of another corporation and carries on the business of sales and servicing of equipment and spare parts. · XU Ltd carries on business fabricating, importing, installing and servicing certain equipment and spare parts. The applicants' advisor explained that the reason why the Excluded Assets include any inventory relating to a specified business of any X Entity was because that business is a separate manufacturing (rather than distribution) business. The applicants' advisor also explained that numerous assets at a number of locations belonging to XU Ltd were included in the Excluded Assets because they relate to the manufacturing operations of the Sellers and only assets related to the Sellers' distribution operations are being transferred pursuant to the Agreement. The applicants' advisor further explained that certain premises were included in Other Excluded Assets because they are manufacturing premises which do not form part of the distribution business carried on by the Sellers which is being acquired by Buyer.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-325, section 11-5

Reasons for decision: Detailed Reasoning - Summary:: The requirements of subsection 38-325(1) and paragraphs 38-325(2)(a) and (b) of the GST Act are satisfied in relation to the supply made by each of XS Ltd, XM Ltd and XU Ltd to Buyer pursuant to the Agreement and each relevant GST Side Agreement. | Detailed Reasoning - The requirements for a GST-free supply under section 38-325 of the GST Act:: Subsection 38-325(2) of the GST Act defines a 'supply of a going concern' as 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 part of a larger enterprise carried on by the supplier. Subsection 38-325(1) of the GST Act provides that a supply of a going concern is GST-free if the supply is for consideration, the recipient is GST registered or required to be GST registered, and the supplier and recipient have agreed in writing that the supply is of a going concern. The ruling request seeks confirmation that the supply made by each of XS Ltd, XM Ltd and XU Ltd to Buyer is a GST-free supply of a going concern. GSTR 2002/5 states (Para 16) that in some cases there may be more than one supply of a going concern under one arrangement where all of the things necessary to operate separate parts of a larger enterprise are supplied under the arrangement and those separate parts are operating and capable of continuing to operate separately and independently. A footnote (2A) to Para 16 refers to Para 131 of GSTR 2002/5 which states: 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. Para 137 in GSTR 2002/5 states: 137. It is not uncommon to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. When the two entities sell their enterprises to one recipient and the contracts are interdependent, each supply must be considered separately. As there are nine Sellers, including XS Ltd, XM Ltd and XU Ltd, which have each agreed to make a supply to one recipient (Buyer) under contracts which are interdependent (the sale made by each Seller to Buyer is governed by the Agreement and relevant GST Side Agreement), we agree that it is necessary to determine whether the supply made by each of XS Ltd, XM Ltd and XU Ltd is a supply of a going concern. | Detailed Reasoning - The supply under the arrangement:: Subsection 38-325(2) of the GST Act states that a supply of a going concern is 'a supply under an arrangement' which satisfies the requirements in paragraphs 38-325(2)(a) and (b). GSTR 2002/5 states (Para 19) that the term 'supply under an arrangement' includes a supply under a single contract. In the present case we consider that the Agreement (including the Exhibits and Schedules) plus the three GST Side Agreements are the relevant arrangement in relation to the supplies made by each of XS Ltd, XM Ltd and XU Ltd. | Detailed Reasoning - The 'identified enterprise':: GSTR 2002/5 states (Para 21) that the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act must be satisfied in relation to an 'identified enterprise', and refers to the 'enterprise' definition in section 9-20 of the GST Act (which includes an activity or series of activities done in the form of a business). In the ruling request it was submitted that each Seller has a separate 'identifiable enterprise' comprising the distribution and support of equipment because each Seller has a management structure, system of deriving income, budgets, and agreements with service providers and external customers which are separate from other X Entities. The Agreement recites that the Sellers desire to sell certain assets related to the Local Business and defines 'Local Business' to mean the equipment sales (including promotion and marketing activities) distribution and aftermarket sales, service and support business conducted by the X Entities in the Territories including such business related to the Products listed in Schedule B to the Agreement and replacement parts for those Products, although 'Local Business' does not include the original product and part manufacturing business conducted by the X Entities in the Territories. The applicants' advisor stated that XS Ltd and XU Ltd each focus on a different type of equipment and that XM Ltd acquired the equipment sales and service division of another entity. The separate locations of the headquarters of each of XS Ltd, XM Ltd and XU Ltd also suggest that each has a separate management structure etc. Based on the 'Local Business' definition in the Agreement and the advice from the Applicants' adviser, we agree with the submission that each of XS Ltd, XM Ltd and XU Ltd has an 'identified enterprise' which comprises the distribution and support of equipment. | Detailed Reasoning - Paragraph 38-325(2)(a):: Paragraph 38-325(2)(a) of the GST Act requires the supplier to supply to the recipient all of the things that are necessary for the continued operation of the 'identified enterprise'. In relation to subsection 38-325(2) generally, GSTR 2002/5 states (Para 29): Subsection 38-325(2) 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 of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. GSTR 2002/5 then discusses the term 'all of the things that are necessary for the continued operation of an enterprise' in paragraph 38-325(2)(a) in detail (Paras 72-89) and states that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise' (Para 72), that a thing is necessary for the continued operation of an 'identified enterprise' if the enterprise could not be operated by the recipient in the absence of the thing (Para 74), and that two elements are essential for the continued operation of an enterprise - the assets necessary for continued operation and the operating structure and process of the enterprise (Para 75) In the ruling request it was submitted that the Sellers will supply the assets necessary for the continued operation of each enterprise and that the Excluded Assets are not necessary for the continued operation of each enterprise as each enterprise can be operated in their absence (per GSTR 2002/5, Paras 72-3) and the Excluded Assets are used as a matter of choice (per GSTR 2002/5 Para 83) (p. 8). The Agreement states that Buyer shall purchase only the Acquired Assets and not the Excluded Assets. As noted above, the Excluded Assets include Excluded Inventory, Excluded Equipment, Excluded Contracts, and Other Excluded Assets. This raised the issue of whether the assets necessary for the continued operation of each identified enterprise are being supplied. For example, in relation to the supply made by XM Ltd, the Excluded Assets include any inventory, equipment or other tangible property, and any orders relating to a specified business of any of the X Entities'. When we raised this issue, the applicants' advisor explained that the specified business was a separate manufacturing business, rather than a distribution business, and for that reason the Agreement specified that inventory related to that specified business were Excluded Assets. In relation to XU Ltd, the Agreement indicates that numerous assets of various classes at a number of different locations are Excluded Assets. The applicants' advisor explained that these assets related to manufacturing operations and manufacturing sites and confirmed that all assets related to XU Ltd's distribution enterprise were included in the Acquired Assets. It was acknowledged in the ruling request that three facilities are listed as Other Excluded Assets in the Agreement. The applicants' advisor explained that these premises related to manufacturing, not to the distribution enterprise being acquired pursuant to the Agreement. In light of the further information provided by the applicants' advisor, we are satisfied that each of XS Ltd, XM Ltd and XU Ltd are supplying all of the assets necessary for the continued operation of each identified enterprise. In the ruling request it was submitted that the Sellers will supply the operating structure and process of each enterprise due to the supply of the Assumed Contracts (including the benefit of the Material Contracts) and the offer of employment to existing employees prior to Closing. GSTR 2002/5 states (Para 124) that the continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient. In our view the 'Acquired Assets' and 'Excluded Contract' definition and the obligation to offer employment indicate that each of XS Ltd, XM Ltd and XU Ltd are supplying the operating structure and process of each identified enterprise. | Detailed Reasoning - Paragraph 38-325(2)(b):: Paragraph 38-325(2)(b) of the GST Act requires that the supplier carries on the identified enterprise until the day of the supply. Goods and Services Tax Ruling GSTR 2002/5 provides (Para 161) that the day of the supply is determined by reference to the terms of the particular contract and the nature of the supply and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In our view the day of the supply in the present case will be Closing Date in the Agreement. As the Agreement obliges each Seller to operate the Acquired Assets only in the ordinary course of the Local Business to which such Acquired Assets relate until the Closing or termination of the Agreement, we consider that paragraph 38-325(2)(b) of the GST Act is satisfied. | Detailed Reasoning - Supply for consideration:: Paragraph 38-325(1)(a) of the GST Act provides that the supply of a going concern is GST-free if the supply is for consideration. Section 195 of the GST Act provides that 'consideration' for a supply means any consideration within the meaning of section 9-15, in connection with the supply. Paragraph 9-15(a) of the GST Act states that 'consideration' includes any payment in connection with a supply of anything. The Agreement states the aggregate consideration for the Acquired Assets is the Base Purchase Price as adjusted the Disclosure Schedule allocates portions of the Base Purchase Price to XS Ltd, XM Ltd and XU Ltd. We are satisfied that the supply made by each of XS Ltd, XM Ltd and XU Ltd pursuant to the Agreement is made for consideration. | Detailed Reasoning - Recipient is GST registered:: Paragraph 38-325(1)(b) of the GST Act provides that the supply of a going concern is GST-free if the recipient is registered or required to be registered. Section 195-1 of the GST Act provides that 'recipient' means the entity to which a supply is made and that in relation to an entity, 'registered' means registered under Part 2-5 of the GST Act. Pursuant to the Agreement Buyer warrants that Buyer is GST registered and we have confirmed that that is the case. | Detailed Reasoning - Supplier and recipient have agreed in writing that the supply is of a going concern:: Paragraph 38-325(1)(c) of the GST Act requires that the supplier and recipient have agreed in writing that the supply is of a going concern. GSTR 2002/5 states (Para 178) that this agreement does not have to form part of the agreement under which the supply of a going concern is made. The Agreement states that the Buyer and each relevant Seller agree to agree by GST Side Agreement that, to the extent that the supply of all or part of the Acquired Assets is the supply by a Seller of one or more enterprises for GST purposes, the supply is the supply of a going concern. The GST Side Agreements are in the form of letters addressed to Buyer from each of XS Ltd, XM Ltd and XU Ltd which state that the purpose of the letter is to record that, for example, XS and Buyer agree that the supply of the Acquired Assets by XS Ltd to Buyer is the supply of a going concern and to ask Buyer to confirm Buyer's agreement by signing and returning to Xs Ltd the attached copy. The copy of each GST Side Agreement supplied to the ATO is signed on behalf of both XS Ltd etc. and Buyer. We therefore agree that, in respect of each of the supplies made by XS Ltd, XM Ltd and XU Ltd, supplier and recipient have agreed in writing that the supply is of a going concern. | Detailed Reasoning - Summary:: Buyer will not make creditable acquisitions in relation to the supplies made to Buyer by each of XS Ltd, XM Ltd and XU Ltd pursuant to the Agreement. | Detailed Reasoning - Detailed reasoning:: Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if, inter alia, the entity acquires anything solely or partly for a creditable purpose and the supply of the thing to that entity is a taxable supply. 'Taxable supply' is defined in section 9-5 of the GST Act, which concludes: However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. And subsection 9-30(1) provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act. Division 38 of the GST Act includes section 38-325 which states that the supply of a going concern is GST-free. As the supplies to be made to Buyer pursuant to the Agreement by each of Xs Ltd, XM Ltd and XU Ltd are GST-free pursuant to section 38-325 of the GST Act, Buyer will not make creditable acquisitions in relation to each of those supplies.

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