Private ruling: GST and supply of a tavern as supply of a going concern
Published: September 2014
Ruling period: Not applicable
Date scheme commenced: Not applicable

Ruling: Q1: Is the supply of a hotel business and retail bottleshop business a GST-free supply of a going concern in accordance with section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes,

Relevant facts and circumstances: • The purchaser is a member of a GST group. • The purchaser acquired a hotel and retail bottleshop business from a vendor for consideration • The purchaser signed a Contract with the vendor. • The vendor covenants that, pending completion, the vendor will continue to operate the business at the date of this contract in the ordinary course as a going concern, and the vendor will use its best endeavours to maintain the profitability and value of the business up to and including the date of completion. • On the date of completion the vendor shall give to the purchaser full and complete delivery of the stock-in-trade and the purchaser shall take delivery and enter into possession thereof. • The title to property and risk in the business assets remains with the vendor until completion and passes to the purchaser on and from completion. The business and business assets shall be at the risk of the purchaser from completion. • The vendor acknowledges that the purchaser has prior to the date of the contract lodged an application for transfer of the liquor licence in the form required by the Liquor Act 1992. • The vendor acknowledges that the purchaser has prior to the date of the contract lodged its application for use of a gaming machine licence endorsed with the operating authorities • The purchaser shall elect whether or not it wishes to take over any or all of the hiring and rental agreements pertaining to the business and shall notify the vendor of its election no later than Y days after the date of the contract. • The purchaser shall elect whether or not it wishes to take over any or all of the services and maintenance agreements and shall notify the vendor of its election no later than Y days after the date of the contract. • The vendor shall release the transferring employees from employment with the vendor with effect from completion. The purchaser will have the right (but no obligation) to offer employment to any of the employees who it believes are suitable (acting reasonably) with effect from date of completion. • The vendor shall surrender its interest in the lease with effect from midnight on the day prior to the date of completion. The vendor must, prior to the date of completion, procure the grant of the new lease in favour of the purchaser, procure the freehold owner to execute the new lease and obtain the consent of any mortgage of land to the grant of the new lease to the purchaser. • The vendor and the purchaser agree that the sale of the business and business assets under the contract is a supply by the vendor to the purchaser as a going concern within the meaning of section 38-325 of the GST Act and that the sale is GST-free. • The vendor warrants that it is supplying all things necessary for the continued operation of the enterprise within the meaning of the GST law.

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

Reasons for decision: Summary: A supply is a GST-free supply of a going concern when all the requirements of section 38-325 of the GST Act are satisfied. Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if: • the supply is for consideration • the recipient is registered or required to be registered for GST, and • the supplier and the recipient have agreed in writing that the supply is of a going concern. Based on the information provided, the supply of the hotel business and retail bottleshop business is for consideration, the recipient is registered for GST as member of the GST group and both parties have agreed in writing that the supply is of a going concern. Therefore, the requirements of subsection 38-325 (1) of the GST Act have been met. | Detailed Reasoning - Supply under an arrangement: A 'supply of a going concern' is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement where: (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) Although the word arrangement is not defined in the GST Act, Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains at paragraph 19 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 the things supplied relate to the identified enterprise. We consider that the purchase of the hotel business and retail bottleshop business under the contract as supply made under an arrangement. The contract between the purchaser and the vendor constitutes an arrangement for the purposes of section 38-325 of the GST Act. | Detailed Reasoning - Identified Enterprise: Under paragraph 38-325(2)(a) of the GST Act, the vendor must supply to the purchaser all the things necessary for the continued operation of an identified enterprise. Paragraph 29 of GSTR 2002/5 explains that subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). Once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise. We are satisfied that the vendor is carrying on an enterprise of a hotel and retail bottleshop business and will supply all of the things that are necessary for its continued operation of the enterprise to LQL. | Detailed Reasoning - Supply of all the things necessary: Subsection 38-325(2) of the GST Act requires that the supplier must supply all of the things necessary for the continued operation of the enterprise. The requirements in paragraphs 38-325(2) (a) and (b) of the GST Act apply to the 'identified' enterprise. In relation to the meaning of the phrase 'all of the things necessary for the continued operation of an enterprise', paragraph 80 of the GSTR 2002/5 states: The 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. Furthermore, paragraph 75 of GSTR 2002/5 identifies two elements that are essential for the continued operation of an enterprise: • the assets necessary for the continued operation of the enterprise, and • the operating structure and process of the enterprise. It is clear from paragraph 75 of GSTR 2002/5 that what is transferred must be more than the business assets of an identified enterprise. Based on the information provided we consider that the supply satisfies the requirement that all of the things necessary for the continued operation of the enterprise under subsection 38-325(2) of the GST Act. | Detailed Reasoning - Enterprise carried on until the day of supply: Under paragraph 38-325(2)(b) of the GST Act, a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of supply. All of the activities of the enterprise must be active and operating on the day of supply. Paragraph 141 of the GSTR 2002/5 provides that the activities must be capable of continuing after the transfer to the new ownership. The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. Paragraph 161 of the GSTR 2002/5 explains that the day of supply is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. The vendor covenants that it will use its best endeavours to maintain the profitability and value of the business up to and including the date of completion. The vendor will continue to operate the business in the ordinary course as a going concern as per the items listed in the contract. Therefore, we agree that the supply also satisfies paragraph 38-325(2)(b) of the GST Act. On the basis that all of the requirements of section 38-325 of the GST Act have been met, the supply of the hotel business and retail bottleshop business to the purchaser by the vendor is a GST-free supply of a going concern.