GST and supply of a management rights business as a going concern

Is entity A, the owner of a management rights business, 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 its business to entity B?

Yes, entity A is making a GST-free supply of a going concern under section 38-325 of the GST Act when it sells its business to entity B.

Entity A owns and operates a management rights business at an apartment complex. In the course of its business, the entity leases a manager's unit (an apartment in the complex) from the unit's owner. The manager's unit includes an office/reception area.

Entity A contracts to sell the management rights business to entity B. The contract specifies that the supply of the management rights business is to be made under an arrangement where entity A: • sells the management rights business to entity B; and • in its capacity as the lessee of the manager's unit, assigns its interest in the lease (including the right to occupy the unit) to entity B.

Entity A carries on the management rights business until the time of settlement of the sale contract. At the time of settlement, entity A transfers to entity B, any inventory or stock that is necessary to carry on the management rights business and also assigns its rights and obligations under the lease (including the right to occupy the manager's unit) to entity B.

The right to occupy the manager's unit under the lease is necessary for the continued operation of the management rights business.

The contract for the sale of the management rights business is a standard contract and sets out the contract price. It states that entity A and entity B agree that the contract provides for the supply of a going concern.

Both entity A and entity B are registered for goods and services tax (GST).

An entity makes a GST-free supply of a going concern where it meets the requirements of section 38-325 of the GST Act.

Subsection 38-325(2) of the GST Act provides that a supply of a going concern is a supply under an arrangement where: • 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).

Entity A carries on the management rights business until the day of the supply. It is also necessary to determine whether the supply of the management rights business is a supply under an arrangement where entity A supplies all of the things that are necessary for the continued operation of the enterprise.

Paragraph 15 of Goods and Services Tax Ruling GSTR 2001/5 provides that it is not the supply itself which must satisfy the definition of a supply of a going concern in subsection 38-325(2) of the GST Act, but the arrangement under which the supply is made.

According to paragraph 20 of GSTR 2001/5, the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts that comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the identified enterprise referred to in subsection 38-325(2) of the GST Act.

Paragraph 68 of GSTR 2001/5 provides that all of the things necessary for the continued operation of an enterprise include the assets necessary for the continued operation and the operating structure and process of the enterprise. Further, paragraph 81 of GSTR 2001/5 makes the point that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied.

In this case, the identified enterprise is the management rights business. Therefore, entity A's sale of its management rights business and assignment of its rights and obligations under the lease, to entity B, are the supplies under the arrangement that need to be considered.

The supplies under the contract for the sale of the manager's unit give effect to the arrangement under consideration, but they are not relevant in determining whether the supply of the management rights business is a supply of a going concern.

At the time of settlement of the contract for the sale of the management rights business, entity A transfers to entity B, any inventory or stock that is necessary to carry on the business. In addition, entity A, as lessee of the manager's unit, assigns its interest in the lease, including the right to occupy the unit, to entity B. The right to occupy the manager's unit under the lease is necessary for the continued operation of the management rights business. Therefore, the supply of the management rights business (sale of business and assignment of lease) is a supply under an arrangement where the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

Entity A carries on the management rights enterprise until the day of the supply, and the supply of the business is a supply under an arrangement where the supplier supplies to the recipient all of the things that are necessary for the continued operation of that enterprise. This satisfies the requirements of subsection 38-325(2) of the GST Act. As such, the supply of the management rights business is a supply of a going concern.

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; 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.

Under the contract for the sale of the management rights business, entity A and entity B have agreed that the sale is the supply of a going concern. In addition, the sale contract states the contract price (consideration for the supply) and that entity B is registered for GST. Therefore, the supply satisfies the requirements of subsection 38-325(1) of the GST Act. As such, the supply of the management rights business is a GST-free supply of a going concern under section 38-325 of the GST Act. [Note: The supply of the manager's unit by way of lease can constitute an enterprise in itself, and therefore, the sale of the leased unit by the unit's owner is capable of being a GST-free supply of a going concern.]