Private ruling: GST and supply of a going concern
Published: November 2011

Ruling: Q1: Are all of the payments received for the supply of your business that included the supply of stock, valued at GST-exclusive cost, consideration for a GST-free supply? | A1: Yes, all of the payments received for the supply of your business are consideration for a GST-free supply.

Relevant facts and circumstances: You are registered for GST. You were carrying on a business of selling goods online (your business). You entered into an agreement with another entity (the purchaser) to sell your business. Under the agreement, you supplied the assets of your business which included the following: · contracts - all agreements and arrangements with or relating to the customers of the business or otherwise to which you are a party such as customer tenders, quotations and similar dealings · intellectual property - any confidential information, know how, records, procedures, brands, trademark, copyright, business names or other intellectual property owned by you at the date of the agreement and used in your business · goodwill · plant and equipment - all the plant and equipment, furniture and fittings You also supplied the stock of the business valued at GST-exclusive cost price. You assigned your rights to lease the warehouse from which you operated your business. You rented the warehouse on a month-to-month basis for a specified amount. Prior to completion of the agreement, you provided oral and written instruction on all operational procedures of the business including but not limited to website operation, supplier contacts, merchant payment facilities, warehouse operation, and marketing strategies. You and the purchaser agreed that the sale of your business is a supply of a going concern. The agreement required that you conduct the business, with due care and in accordance with normal and prudent practice until completion. The purchaser is registered for GST. The agreement specified the consideration payable for the supply, part of which was for the value of the stock.

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

Reasons for decision: Summary: Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern. Section 38-325 of the GST Act states: 1. The *supply of a going concern is GST-free if: o the supply is for *consideration; and o the *recipient is *registered or *required to be registered; and o 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: o the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and o 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). (*denotes a term defined under section 195-1 of the GST Act). We will now determine whether the sale of your business satisfies all the requirements in section 38-325 of the GST Act. Subsection 38-325(2) of the GST Act | Detailed Reasoning - Supply under an arrangement: Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 (available at www.ato.gov.au) 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, you entered into an arrangement to sell the assets of your business together with the stock. Although part of the consideration was for the value of the stock, the supply of the assets and of the stock are supplies made under a single arrangement. The agreement evidences the supplies made under the arrangement. If the supplies that you made under the arrangement constitute a GST-free supply of a going concern, then all of the consideration paid for the sale of your business, including the stock, is consideration for a GST-free supply. Therefore, we must determine whether the sale of your business under the arrangement satisfied the other requirements in subsection 38-325(2) of the GST Act. | Detailed Reasoning - Supplier supplies all 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. An enterprise is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business. You advised that you operated a business of selling goods online. This is the identified enterprise for the purpose of subsection 38-325(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 thing 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. Where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. Where the supplier carries on its enterprise from leased premises, the supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply. Based on the facts provided, you supplied all the things that are necessary for the continued operation of your enterprise and the purchaser was in a position to carry on that enterprise as: · In this case, you assigned your rights to lease the warehouse from which you operated the business. Therefore, you supplied the right to occupy the premises. · Under the agreement, you supplied the assets of the business that included plant and equipment, contracts, intellectual property and goodwill. You also supplied the stock of the business. Furthermore, you provided oral and written instruction on all operational procedures of the business including but not limited to website operation, supplier contacts, merchant payment facilities, warehouse operation, and marketing strategies. | 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. Under the agreement, you were required to conduct the business with due care and in accordance with normal and prudent practice until completion. Therefore, this requirement was satisfied. Accordingly, your supply of business 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 you satisfied all the requirements in subsection 38-325(1) of the GST Act as: · You sold your business for $380, 000 plus $186,000 for the stock; thus, the supply was for consideration; · The purchaser is registered for GST; and · The business sale agreement contains your agreement in writing that the sale is a supply of a going concern. | Summary: Accordingly, the sale of your business was a GST-free supply of a going concern since all the requirements in section 38-325 of the GST Act were satisfied. Consequently, all the payments received, including the part that was for the stock, are consideration for a GST-free supply.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.