Private ruling: Supply of going concern
Date of advice: 11 October 2018
Published: December 2018
Date scheme commenced: 3 August 20xx

Ruling: Q1: Is the supply of the assets and business by Company A to Company B a GST-free supply of a going concern? | A1: Yes. The supply of the assets and business by Company A to Company B is a GST-free supply of a going concern.

Relevant facts and circumstances: Under a written agreement, Company A is proposing to sell one of its business divisions to Company B for a specified amount Company will supply the following: ● Business Records; ● Contracts; ● Equipment; ● Goodwill; ● Property Lease; ● Seller IP Under the agreement, Company B must offer employment to some, or all, of the current permanent employees of Company A. Company A requires a regulatory licence to be operate the business but will retain the licence to operate the rest of its business (that is not being sold). Company B has authority to make the same supplies made by Company A in the course of its business being sold. Company A and Company B are both registered for GST and will be registered for GST at the time of completion of the agreement. The agreement contains a GST clause under which Company A and Company B have made a written agreement that the supply of the assets and business is a supply of a GST-free supply of a going concern (clause 21.3). Company A will continue to carry on the Business until completion of the agreement.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Summary: GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity makes a taxable supply if: (a) the supply is made for consideration; and (b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and (c) the supply is connected with Australia; and (d) the entity is registered or required to be registered However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Company A made the supply of the assets and business for consideration and in the course of its enterprise. The supply is connected with Australia. Company A is registered for GST. As such, the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act are satisfied. Therefore, the supply is a taxable supply unless it is input taxed or GST-free. There is no provision in the GST Act under which the supply of the assets and business is input taxed. Therefore, what remains to be determined is whether the supply is GST-free Under subsection 38-325(1) of the GST Act, the supply of a going concern is GST-free if: 1. the supply is for consideration; and 2. the recipient is registered or required to be registered for GST; and 3. the supplier and the recipient have agreed in writing that the supply is of a going concern. Subsection 38-325(2) of the GST Act further 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 a part of a larger enterprise carried on by the supplier). | Detailed Reasoning - Supply under an arrangement: Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 explain what is meant by ‘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 subsection 38-325(1) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. In this case, Company A entered into an arrangement with Company B under which Company A shall supply the assets and business. The agreement evidences the supplies to be made under the arrangement. | Detailed Reasoning - Supplier supplies all of the things necessary for the continued operation of an enterprise: Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier. This is the enterprise for which the supplier must supply to the recipient all the things that are necessary to carry on the enterprise so that the recipient is put in a position to carry on the enterprise. As part of a larger enterprise, Company A is carrying on business being sold. This is the identified enterprise for the purpose of subsection 38-352(2) of the GST Act. The things which are necessary for the continued operation of an identified enterprise will vary according to the nature of the enterprise and the things supplied. 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. Company A will supply the following to Company B: ● business records; ● distribution contracts and supplier contracts; ● equipment; ● goodwill; ● property lease; ● seller IP In some circumstances, it may not be possible for a supplier to transfer or convey some of the things necessary for the continued operation of an enterprise. Paragraph 48 of GSTR 2002/5 provides an example where a licence cannot be assigned and must be surrendered before a new licence is issued by the relevant authority. Because the relevant thing which is incapable of assignment is necessary for the continued operation of an enterprise, it is arguable that the supplier is unable to supply one of the necessary things. Paragraph 53 of GSTR 2002/5 provides our view that the supply of a thing which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the recipient of that thing for the purpose of section 38-325 of the GST Act in limited circumstances. These circumstances include where normal commercial practice dictates that the supply can only be effected in this way and the thing is actually supplied to the recipient by the statutory authority or other party to the contract. Company A requires a regulatory licence to be able to operate the business being sold. Company will retain its licence to be able to operate the rest of its business. Despite of this, we consider that Company has supplied all the things necessary for Company B to carry on the business if it chooses, given that Company B has authority to the same supplies that Company A makes in relation to the business being sold. | Detailed Reasoning - Supplier carries on the enterprise until the day of the supply: A supply under an arrangement will only be the supply of a going concern where the enterprise is carried on by the supplier until the day of the supply. All activities must be active and operating on the day of the supply. The activities must be capable of continuing. Company A will continue to carry on the business being sold until the completion of the agreement. Therefore, the supply of the assets and business by Company A is a supply of a going concern under subsection 38-325(2) of the GST Act. The next step is to consider subsection 38-325(1) of the GST Act. | Detailed Reasoning - Subsection 38-325(1) of the GST Act: From the information received, all the requirements in subsection 38-325(1) of the GST Act are satisfied as: ● the supply of the assets and business by is for consideration; ● Company B is registered for GST; and ● the agreement contains a clause that Company A and Company B agree that the supply of the assets and business is a supply of a going concern. Accordingly, the supply of the assets and business by Company A under the agreement with Company B is a GST-free supply of a going concern as all the requirements in section 38-325 of the GST Act are satisfied.