Private ruling: S upplies of going concerns
Date of advice: 13 September 2017
Published: January 2018

Ruling: Q1: Is the supply of a business by H Ltd to M Ltd pursuant to a Contract Business Sale the supply of a going concern which is GST-free pursuant to section 38-325 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act)? | A1: Yes. | Q2: Is the supply of the first property by A, B, C, and D to M Ltd pursuant to a Contract for Commercial Land and Buildings the supply of a going concern which is GST-free pursuant to section 38-325 of the GST Act? | A2: Yes. | Q3: Is the supply of the second property by A and B to M Ltd pursuant to a Contract for Commercial Land and Buildings the supply of a going concern which is GST-free pursuant to section 38-325 of the GST Act? | A3: Yes.

Relevant facts and circumstances: The parties entered into three contracts in relation to the sale of a business as follows: Contract Business Sale: Pursuant to a Contract Business Sale between H Ltd (as Seller) and M Ltd (as Buyer) the Seller agreed to sell to the buyer a business on a ‘walk in walk out’ basis. The GST item in the Item Schedule in the Contract Business Sale states that the sale is a sale of a going concern and that clause [ ] in the Standard Conditions applies. Clause [ ] in the Standard Conditions states: If this clause applies: (a) the Buyer warrants that the Buyer is registered or required to be registered under the GST Act; (b) the Buyer must provide to the Seller at least one Business Day before Completion written proof that the Buyer is registered under the GST Act; and (c) if GST is imposed on the supply of the Business, the amount the Buyer must pay at Completion is increased by the amount of the GST. (d) The Seller must carry on the Business as a going concern until the Completion. (e) The parties entered into this Contract on the basis that the supply is GST-free and the Purchase Price is exclusive of GST. (f) If the Seller is or becomes liable for GST on the supply of the Business or any Business Assets under or in connection with this Contract, then Clause 3.5 will apply despite any other provision of this Contract. Clause [ ] provides that the Purchase Price does not include GST. Clause [ ] in Annexure A to the Special Conditions states that the Contract Business Sale is interdependent with the Related Contract (which is defined as the contracts for the sale and purchase of the Premises entered into between the lessors under the Lease as sellers and the Buyer as buyer on or about the date of the Contract Business Sale). Clause [ ] in the Annexure to the Special Conditions states: GOING CONCERN - ATO PRIVATE RULING This Contract is subject to and conditional upon the Buyer applying for and procuring, not later than the Business Day immediately preceding the Settlement Date, a private ruling form the Australian Taxation Office (‘ATO’) to confirm whether or not the transaction contemplated by this Contract and the Related Contract is a going concern and whether or not GST is payable on the purchase price. … In the event that the Buyer is unable to procure the Private Ruling by Settlement or the effect of the Private Ruling is that the transaction contemplated by this Contract and the Related Contract is not a going concern and that GST is payable on the Purchase Price the Buyer and Seller agree that clause [ ] shall not apply and clause [ ] shall apply with the effect that the transaction contemplated by this Contract will not be a going concern and the Buyer must, on Settlement, pay GST in addition to the Purchase Price. Clause [ ] in the Standard Conditions states that the Business includes the goodwill, fixtures, fittings, furniture, chattels, plant and equipment etc. Clause [ ] of the Special Conditions obliges the Buyer to submit to the Seller an application for transfer of the liquor licence and obliges the Seller to provide every reasonable assistance to the Buyer’s application for transfer of the liquor licence. Clause [ ] obliges the Seller to cause the Business Name and Domain Name to be transferred to the Buyer with effect from the Completion Date. Clause [ ] requires the Seller to transfer all permits, licences and authorisations relating to the Business. Clause [ ] requires the Buyer to honour forward bookings entered into by the Seller prior to the Completion Date. Clause [ ] requires the Seller to terminate the employment of all of the Seller’s employees that work in the Business but allows the Buyer to offer to re-employ those employees. Contract for Commercial Land and Buildings re first property: Pursuant to a Contract for Commercial Land and Buildings A, B, C, and D (as Sellers) agree to sell a freehold interest in land to M Ltd (as Buyer). The Reference Schedule states that the sale is a sale of a going concern and clause [ ] of the Standard Terms applies. Clause [ ] states: ● If this clause [ ] applies: ● the Purchase price does not include any amount for GST; ● the parties agree the Supply of the Property is a supply (or part of a supply) of a going concern; ● the Seller warrants that between the date of this Contract and the Settlement Date the Seller will carry on the Enterprise; and the Property (together with any other things that must be provided by the Seller to the Buyer at the Settlement Date under a related agreement for the same Supply) is all if the things necessary for the continued operation of the Enterprise; ● the Buyer warrants that at the Settlement Date it is Registered or Required to be Registered under the GST Act; ● if either of the warranties in clause [ ] is breached: ● the Buyer may terminate this Contract if it becomes aware of the breach prior to the Settlement Date; ● if the Buyer does not terminate this Contract then, at the Settlement Date, the Buyer must pay to the Seller the amount payable by the Seller as GST on the Supply of the Property; ● … ● if the warranty in clause [ ] is not correct the Buyer must pay to the Seller an amount equal to the GST payable in respect of the Supply of the Property. Payment must be made at the Settlement Date, or if Settlement has occurred, immediately on demand; ● if for any reason other than a breach of warranty by the Seller or the Buyer this transaction is not a Supply of a Going Concern, the Buyer must pay to the Seller the amount payable by the Seller as GST on the Supply of the Property. Payment must be made at the Settlement Date or, if settlement has occurred, immediately on demand. Annexure A to the Contract for Commercial Land and Buildings sets out the Special Conditions. Special Condition [ ] provides that the Buyer agrees to acquire the Property subject to the Lease (defined as the lease between the Sellers (as lessors) and H Ltd (as lessee)). Special Condition [ ] provides that from settlement the Sellers assign to the Buyer the benefit of all obligations in favour of the Sellers under the Lease. Special Condition [ ] provides that the Contract for Commercial Land and Buildings is interdependent with the Related Contract which is defined as: ● the Related Business Contract (defined as the Contract Business Sale between H Ltd (as Seller) and M Ltd (as Buyer) for the sale of the business; and ● the Related Land Sale Contract (defined as the Contract for Commercial Land and Buildings for the sale of the second property. Special Condition [ ] obliges the Buyer to obtain a private ruling confirming to confirm whether the transaction contemplated by the Contract for Commercial Land and Buildings and the Related Contract is a going concern and whether or not GST is payable on the Contract Price. Contract for Commercial Land and Buildings re second property: Pursuant to this Contract for Commercial Land and Buildings A and B (as Sellers) and M Ltd (as Buyer) agree to sell a freehold interest in land. The Reference Schedule states that the sale is a sale of a going concern and clause [ ] of the Standard Terms applies. Clause [ ] is identical to the corresponding Standard Term in the Contract for Commercial Land and Buildings for the first property. Special Condition [ ] provides that the Buyer agrees to acquire the Property subject to the Lease (defined as the lease between the Sellers (as lessors) and H Ltd (as lessee)). Special Condition [ ] provides that from settlement the Sellers assign to the Buyer the benefit of all obligations in favour of the Sellers under the Lease. Special Condition [ ] provides that the Contract for Commercial Land and Buildings is interdependent with the Related Contract which is defined as: ● the Related Business Contract (defined as the Contract Business Sale between H Ltd (as Seller) and M Ltd (as Buyer) for the sale of the business; and ● the Related Land Sale Contract (defined as the Contract for Commercial Land and Buildings for the sale of the first property) Special Condition [ ] obliges the Buyer to obtain a private ruling confirming to confirm whether the transaction contemplated by the Contract for Commercial Land and Buildings and the Related Contract is a going concern and whether or not GST is payable on the Contract Price.

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

Reasons for decision: Summary: As the requirements of section 38-325 are satisfied in relation to each supply, each supply is a supply of a going concern which is GST-free. | Detailed Reasoning - Detailed reasoning: Section 38-325: Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act. Division 38 of the GST Act includes section 38-325 which 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 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). (* denotes a term defined in section 195-1 of the GST Act) 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 of the GST Act and when the supply of a going concern is GST-free. Below we first consider whether the requirements in subsection 38-325(2) of the GST Act are met and then address the requirements in subsection 38-325(1) of the GST Act. A supply under an arrangement: Paragraph 19 of GSTR 2002/5 provides that the term ‘supply under an arrangement’ includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement provided that the things supplied under the arrangement relate to the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the ‘identified enterprise’ – refer below). In the present case the supplies under an arrangement comprises the supplies under the three contracts as follows: ● the supply by H Ltd of the business pursuant to the Contract Business Sale; ● the supply by A, B, C, and D (as Sellers) of a freehold interest in the first property subject to the lease between the Sellers (as lessors) and H Ltd (as lessee); and ● the supply by A and B (as Sellers) of a freehold interest in the second property subject to the lease between the Sellers (as lessors) and H Ltd (as lessee) All of those supplies are being made to the same recipient – M Ltd. Subsection 38-325(2) - identified enterprise: Paragraph 21 of GSTR 2002/5 states: 21. Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. Paragraph 22 of GSTR 2002/5 refers to the definition of ‘enterprise’ in section 9-20 of the GST Act which provides that that an enterprise includes, among other things, an activity or series of activities done in the form of a business or on a continuous basis in the form of a lease, licence or other grant of an interest in property. The ruling request referred to paragraphs 137 and 138 of GSTR 2002/5: 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. 138. Where both supplies occur on the same day, each enterprise which is the subject of the separate supplies must be capable of continued operation by the recipient. The supplier of each enterprise can supply all of the things necessary to the recipient to enable them to continue to operate both enterprises. When the supply of both enterprises occurs simultaneously, the recipient of the reversionary interest at the time of the supply of that interest is therefore capable of receiving the benefits of the covenants under the lease. Applying the above analysis, there are three identified enterprises for the purpose of subsection 38-325(2) in the present case: The enterprise carried on by H Ltd as a business – an activity done in the form of a business; The enterprise carried on by the Sellers under the Contract for Commercial Land and Buildings in respect of the first property, i.e. leasing the property to H Ltd – an activity done in the form of a lease; and The enterprise carried on by the Sellers under the Contract for Commercial Land and Buildings in respect of the second property, i.e. leasing the property to H Ltd – an activity done in the form of a lease. Paragraph 38-325(2)(a): Paragraph 38-325(2)(a) of the GST Act requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise. Assets necessary for the continued operation of the identified enterprises: The meaning of ‘all things necessary is discussed in paragraphs 72 to 75 of GSTR 2002/5: 72. The term ‘necessary’ incorporates every attribute of an enterprise that is essential for the continued operation of the ‘identified enterprise’. The things that are ‘necessary’ will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term ‘all of the things that are necessary’ does not refer to every conceivable thing which might be used in the ‘identified enterprise’. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier. 73. 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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise. 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. In relation to the business identified enterprise carried on by H Ltd, Item [ ] in the Items Schedule in the Contract Business Sale refers to the Business, Item [ ] states that the Business is sold on a ‘walk in walk out’ basis and Standard Condition [ ] provides that if the Business is sold on a ‘walk in walk out’ basis then the Business includes goodwill, fixtures, fittings, furniture, chattels, plant and equipment, industrial and intellectual property, work in progress, permits, licences, stock in trade and any other asset set out in a Schedule. Schedule [ ] lists the plant and equipment (beds, TVs, bar fridges etc.). Clause [ ] of the Special Conditions provides for transfer of a liquor licence and clause [ ] provides for transfer of the Business Name and Domain Name. We therefore consider that the Seller is supplying all of the assets that are necessary for the continued operation of the identified enterprise. In relation to the identified enterprises of leasing, paragraph 108 of GSTR 2002/5 states: | Detailed Reasoning - Supply by a lessor of the benefits of covenants under a lease: 108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property. In relation to the identified enterprise of leasing in respect of the first property Item [ ] in the Reference Schedule in the Contract for Commercial Land and Buildings refers to the Lease Schedule and the Lease Schedule refers to a lease of the whole of the land to H Ltd. In relation to the requirement that there is a supply of the property, clause [ ] of the Standard Commercial Terms obliges the Sellers, on settlement’ to deliver possession of the property (such possession to be vacant except for any lease) and a properly executed transfer. Clause [ ] obliges the Sellers to deliver the keys. In relation to the requirement that there is a supply of the covenants of the lease, Special Condition [ ] provides that the Sellers assign to the Buyer the benefit of all obligations in favour of the Sellers under the lease. Paragraph 138 of GSTR 2002/5 confirms that where, as in the present case, Sellers are supplying to a recipient the premises and a different Seller is supplying to the same recipient the business operated from those premises under a lease pursuant to interdependent contracts which settle on the same day, the recipient is capable of receiving the benefits of the covenants under the lease. We therefore consider that the Sellers are supplying all of the assets that are necessary for the continued operation of the identified enterprise. In relation to the identified enterprise of leasing in respect of the second property the terms of the relevant Contract for Commercial Land and Buildings are identical to those for the first property and we therefore consider that the Sellers are supplying all of the assets that are necessary for the continued operation of the identified enterprise. Operating structure and process of the identified enterprises: Paragraph 78 of GSTR 2002/5 provides that the structure and processes used by the supplier in the operation of the identified enterprise must be supplied to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. Paragraph 79 of GSR 2002/5 refers to factors such as the continuation of forward bookings or orders, the passing on of information relating to operation of the enterprise, introduction to existing clients and continuity of marketing arrangements. In relation to the business identified enterprise carried on by H Ltd, Item [ ] in the Items Schedule in the Contract Business Sale refers to the rental agreements in Schedule [ ] (i.e. agreements for the supply of gas, electricity, cable TV, telephone, commercial laundry and refuse removal/grease trap cleaning) and Standard Condition [ ] provides that the Sellers assign the benefit and burden of those agreements to the Buyer. Special Condition [ ] obliges the Sellers to provide details of all forward bookings prior to Completion and obliges the Buyer to honour those forward bookings In relation to the two identified enterprises of leasing, the relevant Contracts for Commercial Land and Buildings provide for the passing on of information relating to the operation of the enterprise. Clause [ ] of the Standard Commercial Terms obliges the Sellers to deliver true copies of the lease to the Buyer. Clause [ ] of the Special Conditions obliges the Sellers to deliver copies of all documents held by the Sellers with respect to the Lease. For the reasons set out above we consider that the requirement in paragraph 38-325(2)(a) of the GST Act that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the identified enterprise is satisfied in relation to the three identified enterprises. Paragraph 38-325(2)(b): Paragraph 38-325(2)(b) of the GST Act requires that 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). Paragraphs 141 and 142 of GSTR 2002/5 provide that all of the activities of the enterprise must be active and operating on the day of the supply and must be capable of continuing after the transfer to new ownership and that a supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased. Paragraph 161 of GSTR 2002/5 provides that the day of the supply is determined in each case by reference to the terms of the contract and is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. In the present case Item [ ] in the Items Schedule of the Contract Business Sale provides that completion is 70 days from the Contract Date and Item [ ] in the Reference Schedule to each Contract for Commercial Land and Buildings provides that settlement date is 70 days from the Contract Date. Standard Condition [ ] in the Contract Business Sale obliges the Seller to carry on the business as a going concern until Completion. Similarly, Standard Commercial Term [ ] in each Contract for Commercial Land and Buildings is a warranty by the Sellers that the Sellers will carry on the enterprise between the date of the contract and settlement. Example 22 in paragraphs 139-140 of GSTR 2002/5 suggests that the continued operation requirement in paragraph 38-325(2)(b) is satisfied in relation to the two leasing identified enterprises provided that the two relevant properties are supplied subject to the leases (which will be the case): Example 22: Supply of two enterprises to one recipient 139. Mr Flintrock owns a commercial property that he leases to Bedstone Pty Ltd, a company of which Mr and Mrs Flintrock are directors and shareholders. Bedstone operates a motel enterprise from the premises. Stoneage Pty Ltd will acquire both enterprises. The successful completion of each contract is subject to the completion of the other contract. Both settlements will take place at the same time. 140. Mr Flintrock is carrying on an enterprise of leasing and can supply everything necessary for the continued operation of that enterprise to Stoneage as a GST-free 'supply of a going concern', provided that the property is supplied with the lease intact. Bedstone will sell all the plant, equipment and goodwill, together with forward bookings. Provided that Bedstone also assigns the lease of the premises to Stoneage, it will be making a GST-free supply of a going concern As Example 22 confirms that there is a supply of a going concern, paragraph 38-325(2)(b) must be satisfied. For the reasons set out above we consider that paragraph 38-325(2)(b) is satisfied in relation to the three identified enterprises. Subsection 38-325(1) of the GST Act: Paragraph 38-325(1)(a) requires that the supply of a going concern is for consideration. The Items Schedule in the Contract of Business Sale and the Reference Schedule in each Contract for Commercial Land and Buildings state a purchase price. Paragraph 38-325(1)(b) requires that the recipient is registered for GST is required to be so registered. Paragraph 186 of GSTR 2002/5 provides that the effective date of registration of the recipient must be on or before the day of the supply. We have confirmed that the Buyer under the Contract Business Sale and the two Contracts for Commercial Land and Buildings, i.e. M Ltd, registered for GST with effect from July 2017. Paragraph 38-325(1)(c) requires the supplier and recipient to have agreed in writing that the supply is of a going concern. Paragraph 181 of GSTR 2002/5 provides that ‘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 of a going concern. In the Items Schedule in the Contract Business Sale the ‘going concern’ box is checked and Standard Condition [ ] provides that the parties entered into the contract on the basis that the supply is GST-free and the purchase price is exclusive of GST. In each Contract for Commercial Land and Buildings Standard Commercial Term [ ] provides that the parties agree that the supply of the property is a supply of a going concern.