Private ruling: Goods and services tax (GST) and going concerns
Published: February 2015

Ruling: Q1: Will company X make a GST-free supply of a going concern? | A1: Company X will make a GST-free supply of a going concern, provided that its purchaser is registered or required to be registered for GST and these two parties agree in writing that the sale company X makes is a supply of a going concern. | Q2: Will partnership Y make a GST-free supply of a going concern? | A2: Partnership Y will make a GST-free supply of a going, provided that its purchaser is registered or required to be registered for GST and these two parties agree in writing that the sale partnership Y makes is a supply of a going concern.

Relevant facts and circumstances: The partnership of certain individuals (partnership Y)(the partnership) is registered for GST. Company X (the company) is registered for GST. The shares in the company are owed by individual A and individual B. The partnership on a certain date purchased the freehold and business (including goodwill and plant and equipment) located at a certain address. The business is made up of a number of business types. The business is licensed by the partnership to the family company, company X. The licensor (partnership) granted to the licensee (company) the exclusive right to use all of the licensor's assets, that is, goodwill, premises and plant and equipment. The licence does not transfer to the licensee any estate, right, title or interest in any of the licensor's assets. A licence fee of a certain amount plus GST was paid each year by the company to the partnership. The company owns trading stock and some plant and equipment, which it has paid for over the years. An offer has been received for a certain amount plus SAV (stock value) for the purchase of the freehold and business. At this time it is not known how the purchaser intends to structure the purchase - one or two purchasers. There will be two or three interdependent contracts. There will be a contract for the sale of the company's assets, including their rights under the licence agreement. Although to date the licence agreement has been a verbal arrangement, it is proposed to formalise a written agreement between the partnership and the company prior to sale. There will be one contract for the sale of the partnership's assets or possibly two contracts for the sale of these assets. There may be a separate contract for the sale of the premises and a separate contract for the sale of the partnership's other assets. The partnership will transfer its rights under the licence agreement to the/a purchaser. The apportionment of the consideration includes a certain amount to the partnership for the premises, goodwill and plant and equipment and a certain amount to the company for plant and equipment and assignment of its rights under the licence agreement plus SAV. Although to date, the licence agreement has been a verbal arrangement, it is proposed to formalise a written agreement between the partnership and the company prior to sale. The company has a master licence, which includes various licences. The master licence is issued by a government authority and cannot be assigned or supplied by the licence holder because of a statutory impediment. The company will surrender its master licence and the licensing authority will issue a new master licence to the purchaser. There is also another licence. This has to be held by an individual. This cannot be assigned or supplied by the licence holder. The purchaser or associated individual would need to go through a police check in order to obtain a new such licence. A certain individual holds the existing such licence. The partnership and company will each carry on their enterprise up to the time of sale.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Summary: The company will supply all of the things necessary for the continued operation of its business and it will carry on its enterprise up to the time of sale. Therefore, it will supply a going concern to its purchaser. | Detailed Reasoning - Detailed reasoning: GST is payable on taxable supplies. You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: You make a taxable supply if: (a) You make the supply for consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *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. (*Denotes a term that is defined in section 195-1 of the GST Act) A supply of a going concern is GST-free if its meets the requirements of subsection 38-325(1) of the GST Act. Supply of a going concern is defined in subsection 38-325(2) of the GST Act, which states: 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 a s a part of a larger enterprise carried on by the supplier). Subsection 38-325(1) of the GST Act states: 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. Paragraph 75 of GSTR 2002/5 sets out the two elements that are essential for the continued operation of an enterprise. It states: 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. Paragraphs 103 and 130 of GSTR 2002/5 discuss licences and personal qualifications. They state: 103. The supply of all of the things that are necessary for the continued operation of an enterprise that has or is required to have, as part of its business activities, statutory licences, permits, quotas or similar things, other than personal qualifications discussed in paragraph 130 of this Ruling, must include those things as part of the supply in order for there to be a 'supply of a going concern'. 130. Marco, a health practitioner, supplies his practice to another practitioner. Marco is required to hold a practising certificate which he gained through study and supervised practice. The qualification is personal to Marco and cannot be transferred to another entity. Provided that everything else necessary to continue to operate the practice is supplied, including the client list, the supply of Marco's practice will be a 'supply of a going concern'. Paragraph 53 of GSTR 2002/5 discusses the situation where a thing necessary for the continued operation of an enterprise is incapable of assignment or supply. It states: 53. 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 purposes of section 38-325 in the following limited circumstances: (a) the thing must be incapable of assignment or supply because of a statutory or legal impediment; and • the supplier must make all reasonable efforts to have the thing supplied to the recipient, for example by way of surrender; and • the supply must be by a statutory authority or other party to the contract with the supplier; and • the thing is actually supplied to the recipient by a party other than the supplier; or (b) if there is no statutory or legal impediment to assignment; and • normal commercial practice dictates that the supply can only be effected in this way;7 and • the supplier conditionally surrenders or terminates their right to the thing and facilitates the entry into a new arrangement between the recipient and the statutory authority or other party to the contract; and • the thing is actually supplied to the recipient by the statutory authority or other party to the contract. Paragraphs 137 to 140 of GSTR 2002/5 discuss the situation where two suppliers supply two separate enterprises to one recipient. They state: | Detailed Reasoning - Supply of two separate enterprises by two suppliers to one recipient: 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. 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. If there is one purchaser in the case in question, the policy in paragraphs 137 to 140 of GSTR 2002/5 would apply to this case because two separate enterprises would be supplied by two suppliers to one recipient and the assets sold by one supplier will be assets that the supplier has given rights to the other supplier to use in the enterprise that the other supplier has carried on. Therefore, even if there is only one purchaser in the case in question, the requirements of going concerns may be met. The business that the company carries on The things necessary for the continued operation of this business are the plant and equipment that the company owns, the trading stock, their rights as licensee under the licence agreement which gives it the right to operate this business and use the plant and equipment, premises and goodwill owned by the partnership, a master licence and a liquor licence. The company will supply the plant and equipment it owns, the trading stock and assign its rights under its licence agreement to the/a purchaser. The master licence is incapable of assignment or supply because of a statutory impediment, but the company will surrender this licence and a new such licence will be issued to the purchaser by an entity other than the current licensee, that is, the relevant statutory authority will issue the new licence. Therefore, the company will be treated as supplying a master licence to the purchaser, for the purposes of the going concerns provisions, in accordance with paragraph 53 of GSTR 2002/5. In accordance with paragraph 130 of GSTR 2002/5, because the certain type of licence is a personal qualification, it is not necessary that this be supplied to the purchaser in order to meet the requirement of paragraph 38-325(2)(a) of the GST Act. Hence, the company will supply all of the things necessary for the continued operation of its business to the/a purchaser. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met. The company will operate its business up to the time of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met. Hence, the company will supply a going concern to the/a purchaser because both requirements of section 38-325(2) of the GST Act are met. There will be consideration for the supply that the company makes. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met. Hence, the company will make a GST-free supply of a going concern to the/a purchaser if the purchaser is registered or required to be registered for GST and these two entities agree in writing that the sale of the company's assets is a supply of a going concern. | Summary: The partnership will supply all of the things necessary for the continued operation of its licensing enterprise and it will carry on its enterprise up to the time of sale. Therefore, it will supply a going concern to its purchaser. | Detailed Reasoning - Detailed reasoning: The partnership is operating an enterprise of supplying a licence to the company. The things necessary for the continued operation of this enterprise are, the partnership's interest in the licence to operate the business that the company operates, and the premises, goodwill and plant and equipment that the partnership owns. The partnership will assign its interest in the licence agreement to the/a purchaser and sell the premises, goodwill and plant and equipment that it owns to that purchaser. Hence, the partnership will supply all of the things necessary for the continued operation of its enterprise to the/a purchaser. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met. The partnership will carry on its enterprise up to the time of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met. Hence, the partnership will supply a going concern to the/a purchaser because both requirements of section 38-325(2) of the GST Act are met. The partnership will receive consideration for the supply of its business. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met. Hence, the partnership will make a GST-free supply of a going concern to a purchaser if the purchaser is registered or required to be registered for GST and these two parties agree in writing that the sale of the partnership's assets is the supply of a going concern. It is not necessary that the partnership enter into a lease agreement with the company in respect of the premises prior to sale in order for the partnership to be making a GST-free supply of a going concern. In summary, the parties to the transactions have the option to make the sales GST-free supplies of going concerns and this will be the case whether there is one purchaser or instead two purchasers and whether or not there is a separate contract for the sale of the premises.