Private ruling: GST and supply of a going concern
Published: June 2012

Ruling: Q1: Is an Australian entity (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) to entity A in relation to the sale of a business where the settlement of the sale of the business and the sale of the property occurs simultaneously? | A1: Yes, your sale of the business to entity A is a GST-free supply of a going concern. | Q2: Are you making a GST-free supply of a going concern under section 38-325 of GST Act to entity B in relation to the sale of the property where the settlement of the sale of the property and the sale of the business occurs simultaneously? | A2: Yes, your sale of the property to entity B is a GST-free supply of 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 9-20 | A New Tax System (Goods and Services Tax) Act 1999, section 38-325 | A New Tax System (Goods and Services Tax) Act 1999, subsection 38-325(1) | A New Tax System (Goods and Services Tax) Act 1999, subsection 38-325(2)

Reasons for decision: Detailed Reasoning - Sale of business: GST is payable on a taxable supply under section 9-5 of the GST Act. Your supply of the business satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows: · you make the supply for consideration; · the supply is made in the course or furtherance of your enterprise; · the supply is connected with Australia as the motel business is located in Australia; and · you are registered for GST. However, the supply is not taxable to the extent that it is GST-free or input taxed. There are no provisions under the GST Act in which the supply of the business could have been input taxed. The relevant GST-free provisions are discussed as below: | Detailed Reasoning - GST-free: A supply of a going concern is GST-free under section 38-325 of the GST Act. Subsection 38-325(1) of the GST Act states: (1) The *supply of a going concern is GST-free if: · the supply is for *consideration; and · the *recipient is *registered or *required to be registered; and · the supplier and the recipient have agreed in writing that the supply is of a going concern. (* denotes a defined term under section 195-1 of the GST Act). The requirements in subsection 38-325(1) of the GST Act are satisfied as the supply is made by you to entity A for consideration; entity A (as the recipient) is registered for GST; and you and entity A have agreed in writing that the sale is of a going concern (as agreed in your contract of sale). In addition to these requirements, a supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act. | Detailed Reasoning - Determining whether there is a supply of a going concern: Subsection 38-325(2) of the GST Act provides the definition of a 'going concern': (2) A supply of a going concern is a supply under an arrangement under which: · the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and · 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). Goods and Services Tax Ruling 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. | Detailed Reasoning - Supply under an arrangement: Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 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. From the facts provided, the contract for the sale of the business evidences that the supply of the business by you to entity A will be made under an arrangement and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied. | Detailed Reasoning - Relevant enterprise: Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise. The term 'enterprise' is defined in section 9-20 of the GST Act, and includes (amongst others) an activity, or series of activities, done: in the form of a business; or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property. From the information provided, you conduct the enterprise of a business on a regular and continuous basis which is the identified enterprise. | Detailed Reasoning - Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise: The next step is to determine whether you are supplying all of the things necessary to entity A for the continued operation of the business. Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing. 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. The intended and actual use by the recipient of all of the things supplied are not relevant in determining if there is a supply of a going concern. The enterprise may be continued as a different enterprise, as part of a larger enterprise, or may not be continued at all by the recipient (paragraphs 80 and 81 of GSTR 2002/5). Further, paragraph 75 of GSTR 2002/5 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. The relevant enterprise in your case is a business. We need to consider whether you supplied the assets, operating structure and process essential for the continued operation of this enterprise, to the purchaser. In relation to the supply of two enterprises by one supplier to two or more recipients, paragraphs 132 to 136 of GSTR 2002/5 state: 132. Where the owner of both a business enterprise and of the real property upon which the business enterprise is necessarily conducted sells the business enterprise to a second entity and the business premises to a third entity, the supply to the second entity will not be the 'supply of a going concern'. This is because the second entity has not been supplied with one of the things necessary for the continued operation of that enterprise, by the supplier, that is, the business premises. 133. Where the owner of both the business enterprise and the premises grants a lease of the premises in favour of the second entity by the day of the supply of the business enterprise to that second entity, the supplier is supplying the second entity with all of the things that are necessary for the continued operation of the enterprise. The requirement that the premises are supplied to the second entity is met even if the property is subsequently sold to a third entity subject to a lease. 134. Similarly, the supply of the real property to the third entity on a later day that is subject to a lease to a second entity in the circumstances described in the preceding paragraph, may also be the 'supply of a going concern'. This is because an enterprise of leasing the relevant property is conducted by the supplier up to the day of the supply, albeit for a brief period of time. The supplier, being the owner of both the business and the real property, is making two supplies, each of which is capable of being the 'supply of a going concern'. | Detailed Reasoning - Example 21: One supplier and two recipients: 135. Smithers Pty Ltd (Smithers) operates a bookshop enterprise from premises that it owns. It decides to sell the bookshop enterprise. The purchaser, Bookworm Pty Ltd (Bookworm), for financial reasons does not want to purchase the freehold. Smithers agrees to sell the bookshop enterprise and enters into an agreement to lease the premises to Bookworm. The day of supply is to be 30 August. Assuming all other requirements of subdivision 38-J are satisfied, Smithers is making a GST-free 'supply of a going concern', provided that the property is supplied with the lease intact. 136. Landmark Pty Ltd (Landmark) is a separate legal entity, although its directors and shareholders are also directors and shareholders of Bookworm. Landmark enters into an agreement with Smithers to acquire the building. The day of supply will be 31 August. Smithers supplies the building to Landmark with the lease intact. For the purposes of section 38-325, we will accept that Smithers has carried on an enterprise of leasing, albeit for only a day, and can therefore make a GST-free supply of a going concern, when he supplies the leasing enterprise. Based on the facts provided, you are supplying to entity A the business including furniture and fittings and goodwill. Furthermore, you will enter into a lease agreement for the property with entity A on the day of the settlement of the business. Therefore, you will supply entity A all the things that are necessary to continue the operation of business and the requirement of paragraph 38-325(a) of the GST Act is satisfied. | Detailed Reasoning - Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply: Paragraph 141 of GSTR 2002/5 states: 141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership. 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. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5). From the information provided, you are currently operating the business and will continue to carry on the enterprise until the date of the supply of business to entity A. Therefore paragraph 38-325(2)(b) of the GST Act will be satisfied. Accordingly, you will be making a supply of a going concern as defined in subsection 38-325(2) of the GST Act in relation to the supply of the business to entity A, and the supply is GST-free. | Detailed Reasoning - Supply of the property to entity B: As discussed in the reasons for decision to issue 1, the supply of property to entity B will be taxable if it meets all the requirements in section 9-5 of the GST Act. From the facts provided, your sale of the property satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as you make the supply for consideration; the supply is made in the course or furtherance of your enterprise; the supply is connected with Australia as the property is located in Australia; and you are registered for GST. However, the supply is not taxable to the extent that it is GST-free or input taxed. There are no provisions under the GST legislation in which your supply of the property with the existing leases could have been input taxed. What remains to be determined is whether the supply is GST-free. | Detailed Reasoning - GST-free: As discussed in the reasons for decision to issue 1, a supply of a going concern is GST-free if it satisfies all the requirements in subsection 38-325(1) of the GST Act. In this case, the requirements in subsection 38-325(1) of the GST Act are satisfied as: · the supply is made by you to entity B for consideration; · entity B (as the recipient) is registered for GST; and · you and entity B have agreed in writing that the sale is of a going concern (as agreed in your contract of sale). In addition to these requirements, a supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act. One of the requirements under subsection 38-325(2) of the GST Act is, a supply of a going concern is a supply under an arrangement. Based on the facts provided, the contract for the sale of the property evidences that the supply of the property by you to entity B will be made under an arrangement, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied. | Detailed Reasoning - Relevant enterprise: As discussed in the reasons for decision to issue 1, paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all the things are supplied by the supplier to the recipient to continue that enterprise. We need to determine whether the relevant enterprise is being carried on by you. You will enter into a lease agreement for the property with entity A on the day of the settlement of the contract for the sale of the business. Later on the same day, you will settle the contract for the sale of the property. For the purposes of section 38-325 of the GST Act, we will accept that you have carried on enterprise of leasing, albeit for a brief period of time. Therefore, the identified enterprise for the purposes of subsection 38-325(2) of the GST Act being carried on by you is a leasing enterprise. | Detailed Reasoning - Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise: The next step is to determine whether you supply all of the things necessary to entity B for the continued operation of the leasing enterprise. Generally, all the things that are necessary for the continued operation of a property leasing enterprise include the supply of the property and the benefit of the covenants under a lease. You will supply the property with the existing lease agreement in place at settlement. As you will supply entity B the property and assign the existing lease at settlement, entity B will be able to continue the enterprise of leasing. Furthermore, you will carry on the leasing enterprise of the property until the date of the supply. Accordingly, you will supply entity B with all of the things that are necessary for the continued operations of the leasing enterprise carried on from the property, and the requirement of paragraph 38-325(a) of the GST Act will be satisfied. | Detailed Reasoning - Paragraph 38-325(2)(b) - Supplier carries on the enterprise until the day of supply: You will continue the leasing enterprise that is being carried on the property until the day of supply as the property is sold subject to the lease which will extend beyond the settlement date. Accordingly, the requirement of paragraph 38-325(b) of the GST Act is satisfied. As all the requirements of section 38-325 of the GST Act are satisfied, your supply of the property subject to the lease to entity B is a GST-free supply of a going concern.

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. | Relevant facts: You are an Australian entity who owns the property in Australia. You operate the business from the property. | You are currently negotiating sale of the business to entity A and sale of the property to entity B. | Entity A and entity B are related entities and are registered for GST. | You will supply entity A the business including furniture and fittings, goodwill and a lease for the property. | You and entity A have agreed in writing that the sale of the business will be a supply of a going concern. | You will continue to carry on the business until the day of the settlement. | You and entity B have agreed in writing that the sale of the property will be a supply of a going concern. | Initially you were planning to do the settlement for the business one day and the settlement for the property the next day. However, the financial institution providing finance to purchasers for the business and the property requires that the two contracts settle simultaneously. | The purchasers contend that because the contracts are inter-related, the entire supply across both contracts will be a GST-free supply of a going concern as all the things necessary for the continued operation of the business have been supplied. | You will enter into a lease for the property with entity A, on the same day that settlement is to occur for your supply of the business to entity A. Later on the same day, the settlement will occur for the supply of the property by you to entity B. | Entity B will continue to lease the property to entity B as per the lease which comes into existence on the settlement of the business contract between you and entity A earlier on the day.