Private ruling: GST - sale of a going concern
Date of advice: 5 December 2023
Published: 22 January 2024
Ruling period: Commencing on dd/mm/yyyy and ending on dd/mm/yyyy

Ruling: Q1: Are you making 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) when you sell your restaurant business? | A1: No.

Relevant facts and circumstances: You are registered for GST. You operate a restaurant business from leased premises. You are in the process of selling the business. The sale is ready to settle pending this private ruling. The premises from which you operate your restaurant are owned by an unrelated third party (the lessor). The premises are leased to your related entity, X Pty Ltd ABN xx xxx xxx xxx, due to asset protection. There is no written agreement between you and your related entity regarding the premises. You do not make any payments in relation to the lease of the premises. Your related entity makes the lease payments to the lessor. During the sale of the business, the lease of the premises will be transferred to the purchaser. The purchaser is registered for GST. You and the purchaser agree to sell the business as a going concern.

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: Your supply of the restaurant business is not a GST-free supply of a going concern as the supply does not meet all the requirements of section 38-25 of the GST Act. The supply is a taxable supply under section 9-5 of the GST Act. | Detailed Reasoning - Detailed reasoning: Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. Section 38-325 of the GST Act 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). In order to determine whether the sale of an enterprise to the purchaser is a GST-free supply of a going concern, firstly it needs to be determined whether the sale is a supply of a going concern as defined in subsection 38-325(2) of the GST Act. Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the identification of an enterprise that is being carried on by the supplier. 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. Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses what is a 'supply of a going concern' for the purposes of Subdivision 38-J of the GST Act and when the 'supply of a going concern' is GST-free. GSTR 2002/5 also considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' for the purposes of paragraph 38-325(2)(a) of the GST Act. Paragraph 80 of GSTR 2002/5 provides that a supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses. Paragraph 72 of GSTR 2002/5 relevantly states: 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. ... In this case the identified enterprise is the restaurant business. All of the things that are necessary for the continued operation of a restaurant business include among other things the premises from which the business is operated. Accordingly, for the sale of a restaurant business to be a supply of a going concern, the supplier must supply the premises which may, relevantly, be either by assignment of the lease to the purchaser or surrendering the existing lease agreement and facilitating the entry by the purchaser into a lease so that the purchaser can continue to carry on the restaurant business without any disruption. In your case the premises are leased to your related entity who makes all the lease payments. There is no written agreement between you and your related entity regarding the premises and you do not make any payments in relation to the premises. Paragraphs 64 to 70 of GSTR 2002/5 consider the GST implications where leased premises are occupied without a formal lease in place. Paragraphs 64 and 67-68 of GSTR 2002/5 state: | Detailed Reasoning - Periodic Tenancies and Tenancies at Will Circumstances: 64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern. ... Example 8: Premises occupied under a tenancy at will arrangement 67. Greg and Isabel own a commercial property as tenants in common. They also are the sole shareholders and directors of a company (GI Panels Pty Ltd) that operates a panel beating enterprise from these premises. The company pays the council rates and taxes on behalf of Greg and Isabel. It does not have a written lease agreement, and does not make any other payments to Greg and Isabel on a regular basis. GI Panels does not have a legally enforceable right to occupy the premises for a specified period. 68. The company occupies the premises under a tenancy at will arrangement. GI Panels decides to sell the enterprise to another entity (Bodies from Heaven Pty Ltd). As the premises, or the right to occupy some premises cannot be supplied by GI Panels to Bodies from Heaven, and premises are one of the necessary things, the supply of the panel beating enterprise is not a GST-free supply of a going concern. Similarly, in your case you are occupying the premises under a tenancy at will arrangement. You do not have a legally enforceable right to occupy the premises, therefore you cannot supply the right to occupy the premises to the purchaser. As the premises are one of the necessary things, the supply of your restaurant business does not meet the requirements of paragraph 38-325(2)(a) of the GST Act. Accordingly, the supply of the restaurant business is not GST-free as it does not meet all the requirements of section 38-325 of the GST Act. It is not necessary to consider whether you supply all the other things that are necessary for the continued operation of the restaurant business or whether the supply meets the other requirements of section 38-325 of the GST Act. The supply of your restaurant business is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.