Issue
Can an entity supply a thing that is being utilised in its business, but which is not necessary for the continued operation of that business, independently of the arrangement referred to in subsection 38-325(2) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), under which the entity's business is sold to the same recipient as a GST-free going concern?
Decision
Yes, an entity can supply something that is being utilised in its enterprise, which is not necessary for the continued operation of the enterprise, independently of the arrangement referred to in subsection 38-325(2) of the GST Act ('the arrangement'), under which the entity's business is sold to the same recipient as a GST-free going concern. A thing is considered to be supplied independently of the arrangement if: (I). it is supplied under a separate, independent agreement whose terms are not dependent upon any other agreement under which the entity's business is supplied to the recipient as a GST-free going concern; and (II). it is not identified as being a part of the arrangement in a written agreement entered into by the parties for the purposes of paragraph 38-325(1)(c) of the GST Act, or in any other written agreement that describes the arrangement under which the entity's business is sold to the recipient as a GST-free going concern.
Facts
The entity is a company that is operating a business. The entity occupies the premises from which the business operates under a lease granted by the owner of the premises; a fully owned subsidiary of the entity.
The entity owns a residence on an adjoining lot, which is being utilised in the enterprise by a manager of the business who resides in the premises, as part of his employment contract, under a residential tenancy agreement with the entity.
The entity arranges to sell its business to a purchaser. Amongst other things, the agreement for sale of the business provides that the entity will supply to the recipient all of the things necessary for the continued operation of the business, including: • all of the plant and equipment used in the operation of the business; • existing customer lists; and • all current and forward orders from customers.
The agreement for sale of the business also incorporates a tripartite arrangement with the entity's wholly owned subsidiary, whereby the subsidiary (the landlord) agrees that the benefits of covenants under the lease of the business premises will be assigned to the purchaser of the business.
Under a separate agreement, that is not expressed to be dependent upon the business sale agreement, the entity also sells the residence located on the adjoining block and the shares in its wholly owned subsidiary to the purchaser of the business.
The business enterprise is operated until the day of supply.
The conditions listed in paragraphs 38-325(1)(a) and 38-325(1)(b) of the GST Act are satisfied.
The entity and the purchaser have agreed in writing that the sale of the business pursuant to the business sale agreement, is a supply of a going concern.
There are no other written agreements relating to, or dependant on, the sale of the entity's business as a GST-free going concern.
Reasons for Decision
Section 38-325 of the GST Act provides that a supply of an enterprise will be GST-free if certain conditions are met. Subsection 38-325(1) of the GST Act lists the conditions for a supply of a going concern to be GST-free. Subsection 38-325(2) of the GST Act defines the term 'supply of a going concern' as: (2) 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 as part of a larger enterprise carried on by the supplier).
Subsection 38-325(2) of the GST Act requires that under an arrangement, the supplier supplies all things that are necessary for the continued operation of an enterprise (the term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported).
Paragraph 166 of Goods and Services Tax Ruling GSTR 2002 / 5 : when is a ' supply of a going concern' GST-free ? (GSTR 2002/5) states that the supply under an arrangement of a going concern may include those things which, while not essential to the continued operation of the business, are utilised in the enterprise carried on by the supplier until the day of the supply.
Paragraph 168 of the same ruling states that supplies which are not made under the relevant arrangement will not form part of the 'supply of a going concern' and will not be GST-free under subsection 38-325(1) of the GST Act.
The entity's supply of its business pursuant to the business sale agreement is a 'supply of a going concern' under subsection 38-325(2) of the GST Act. As the requirements of subsection 38-325(1) of the GST Act are satisfied, the entity's supply of the going concern will be GST-free.
The entity's supplies of the residence and the shares in its subsidiary under a separate, independent agreement do not form part of the arrangement for the purposes of subsection 38-325(2) of the GST Act and are not part of the entity's supply of the GST-free going concern. That is, the supply of the residence and the shares are separate to, and excluded from, the entity's supply of the GST-free going concern under section 38-325 of the GST Act. Note 1: For the purposes of this ATO interpretative decision, a reference to the supply or sale of the entity's business is a reference to the supply of all of the things under an arrangement that satisfies the requirements in subsection 38-325(2) of the GST Act. Note 2: A supply of something utilised in an entity's enterprise, which is not necessary for the continued operation of the enterprise, will form part of the arrangement referred to in subsection 38-325(2) of the GST Act, and will form part of the supply of a GST-free going concern, if it is supplied under a contract that is dependent upon the sale of the entity's enterprise as a GST-free going concern. Note 3: A supply of an entity's business cannot qualify as a GST-free supply of a going concern if something that is necessary for the continued operation of that business is not supplied to the recipient under the arrangement referred to in subsection 38-325(2) of the GST Act. Note 4: Paragraphs 173 to 174 of GSTR 2002/5 provides an example of circumstances where shares in a wholly owned subsidiary are considered to be a supply under the arrangement referred to in subsection 38-325(2) of the GST Act.