Issue
Is the entity, a business operator, 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 it sells all things necessary for the continued operation of its business except for the trading name, which it licenses to the purchaser?
Decision
Yes, the entity is making a GST-free supply of a going concern under section 38-325 of the GST Act when it sells all things necessary for the continued operation of its business except for the trading name, which it licenses to the purchaser.
Facts
The entity is a business operator. The entity enters into an arrangement with a purchaser under which it sells its business to the purchaser except for the trading name of the business. The trading name is licensed to the purchaser for a specified period of time under a separate contract commencing on settlement.
The trading name is a crucial part of the business
The sale and the licence are for consideration. The entity and the purchaser have agreed in writing that the supply of the business is the supply of a going concern. In addition, the entity carries on the business until the day of the supply.
The purchaser is registered for goods and services tax (GST).
Reasons for Decision
The 'supply of a going concern' is GST-free where the requirements of section 38-325 of the GST Act are met.
Subsection 38-325(2) of the GST Act provides that 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 part of a larger enterprise carried on by the supplier).
Paragraph 19 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free states: The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement.
Therefore, an entity may supply a going concern under more than one contract provided that all of the contracts are part of the one arrangement.
The entity has entered into two separate contracts, one for the sale of the business and one for licensing the trading name. The two contracts comprise a single arrangement.
As the entity carries on the business until the day of the supply, it remains to be determined whether under the arrangement, the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise.
The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in GSTR 2002/5. Paragraph 80 of 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.
The entity's enterprise is a business operating under a trading name. In light of the nature of the enterprise and the core attributes of that enterprise the trading name is one of the things that are necessary for the continued operation of the identified enterprise.
Paragraph 38-325(2)(a) of the GST Act requires that all things necessary for the continued operation of the enterprise be supplied to the purchaser. The definition of the term 'supply' in section 9-10 of the GST Act includes 'a creation, grant, transfer, assignment or surrender of any right'. A licence to use a trading name is a grant of a right for the purposes of the definition. Therefore, for the purposes of paragraph 38 325(2)(a) of the GST Act an entity supplies the trading name when it grants the purchaser a licence to use it.
Paragraph 100 of GSTR 2002/5 states: The supply of all of the things that are necessary for the continued operation of an enterprise may require that the supplier enters into contracts, leases or other things which were not in existence prior to the day of the supply. This will be the case where the supplier retains the ownership of premises from which an enterprise is conducted, but supplies the business structure and possession of the premises by way of lease.
In respect of the identified enterprise the supply of all of the things that are necessary for the continued operation of the enterprise requires that the supplier grant the licence to the purchaser to use the trading name. The licence was not in existence prior to the day of the supply.
Paragraph 100 of GSTR 2002/5 means that the entity can grant the licence over the trading name to the purchaser on the day of the supply.
Accordingly, the entity supplies to the purchaser all of the things necessary for the continued operation of the enterprise. Therefore, the entity makes a supply of a going concern under subsection 38-325(2) of the GST Act.
Subsection 38-325(1) of the GST Act provides that a 'supply of a going concern' is GST-free if: • the supply is for consideration; and • 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.
The supply of the business and the trading name is for consideration, the purchaser is registered for GST and the entity and the purchaser have agreed in writing that the supply is of a going concern. As such, the requirements in subsection 38-325(1) of the GST Act are satisfied.
Therefore, the entity makes a GST-free supply of a going concern under section 38-325 of the GST Act. Note: The licence can, but does not need to be granted before the day of the supply. The licence cannot be granted after the day of the supply.