In brief - Transaction has to be considered from the perspective of the supplier
The essential ingredients to have a transaction exempt from GST on the basis that it is the supply of a going concern are now clearly enunciated and show that a transaction has to be considered from the perspective of the supplier and that all of the necessary elements for continued operation of the enterprise must be transferred.
Australian Taxation Office (ATO) issues updated version of GSTR 2002/5
A consolidated and updated version of Goods and Services Tax Ruling GSTR 2002/5 was issued in late 2012 dealing with when a supply of a going concern is GST free.
The supply of a going concern is GST free if:
- the supply is for a consideration (i.e. money or some other benefit)
- the recipient is registered or required to be registered for GST purposes
- the supplier and the recipient agree in writing that the supply is of a going concern
A supply of a going concern requires that the supplier supplies to the recipient all things that are necessary for the continued operation of the enterprise, and that the supplier carries on the enterprise until the date of supply.
Sale of hotel held to be GST-free supply of a going concern
There may be more than one supply made under an arrangement. However, the supply of a going concern is the aggregate of all the supplies made under that arrangement.
The matter of Debonne Holdings v Commissioner of Taxation dealt with the sale of a hotel pursuant to two interdependent contracts (one for the sale of the business and the other for the sale of the real estate on which the hotel was located).
It was held in that matter that, even though there were two separate contracts, the totality of the sale constituted by the two transactions was a GST-free supply of a going concern.
Effectively, the two elements constituted a single supply.
Enterprise needs to be conducted continuously until the day of supply
The enterprise must be undertaken prior to the date of supply. Therefore, a lease which comes into effect on the day of or the day after settlement is not sufficient, as this means that there has been no enterprise carried on prior to the date of the supply.
One of the requirements to have a going concern exemption is for the enterprise to be conducted until the day of supply. For example, if the enterprise is the leasing of a commercial building and part of the building is vacant at the date of contract or it becomes vacant between exchange and settlement, the vendor must continue to market the space for rental so that there is a continuation of the supply.
Recipient of the supply needs to be a single entity
The ATO is of the view that the statutory provisions require a single entity to be the recipient of the supply. The ATO states that this is because the supplier has to supply all of the things that are necessary for the continued operation of the enterprise to the recipient, and the recipient must, on the day of supply, continue to operate the enterprise. Therefore, only one entity can operate the enterprise, not multiple entities.
Licences, permits, quotas and lease of premises
If there is a licence, permit or quota necessary for the operation of the business, it has to be either transferred or surrendered by the supplier, with a request that it be transferred or reissued to the recipient.
Many enterprises require premises to conduct an enterprise. The supplier can either surrender any leasehold or occupation rights that it has and facilitate the entering into of a new arrangement by the recipient, or assign those rights. This would seem to be the same even if the occupation by a supplier is pursuant to a short-term periodic tenancy.
The ATO is of the view that where one entity owns premises and another owns the business conducted from the premises and they are both transferred on the same day to the same recipient (with the contracts being interdependent), as the recipient of the business interest at the time of supply of that interest is capable of receiving the benefit of the covenants under the lease, all things necessary for the continued operation of the business had been transferred to the recipient.
Transfer of everything essential for continued operation of enterprise
As indicated previously, everything necessary for the continued operation of the enterprise must be transferred to the recipient. The ATO is of the view that this relates to anything "that is essential for the continued operation of the identified enterprise". This would exclude access to supplies or infrastructure which is supplied by third parties, such as a statutory authority.
There are two essential elements for the continued operation of an enterprise. One is the transfer of all assets necessary to conduct the enterprise, for example plant, intellectual property, licences, premises and goodwill. The other is the operating structure and process of the enterprise, for example:
- forward bookings and orders
- introduction of existing clients and suppliers of services or plant
- marketing material/capital
Where particular premises are not required but premises of the type required for the enterprise are to be secured by the purchaser as part of the acquisition of a business, this may be deemed to be sufficient to enable a going concern exemption to apply where there is an enforceable right by the tenant to lease the alternative premises.
There may be other things which are necessary for the continued operation of the business after transfer such as restrictive covenants, transfer of key staff, information/manuals about key processes, intellectual property rights or appropriate franchises.
Going concern exemption and leasing of buildings
Where a building has been leased or is partly leased and tenants for the vacant space have been sought, this may constitute a GST exempt supply of a going concern. However, where a building has not previously been leased but is being actively marketed for lease, there is no "enterprise of leasing" as no leasing activity has ever taken place before the supply has occurred.
Where some areas may not be available for leasing (for example storage facility, building manager's office or the like), if all floor space which is capable of being rented is offered for lease, and part of the building is or has been leased previously and the remainder is being actively marketed for leasing, then the going concern exemption will apply.
The recipient must be registered or required to be registered before the date of supply. If a recipient is not required to be registered but chooses to be registered, this does not satisfy the relevant statutory requirements entitling the going concern exemption to apply.
Partners disposing of their interest in a partnership
With partnerships, as a partner has a divisible interest in each of the assets of the partnership, when a partner disposes of his or her interest in a partnership, the supply of that interest will not constitute the supply of a going concern. This is because the supply is not in the course of furtherance of an enterprise that is carried on by the partner.
Going concern exemption claimed but rejected by ATO
One needs to carefully assess all elements and ingredients of a transaction to ascertain whether or not the going concern exemption will apply. The most crucial provision is subsection 38-325(2) of A New Tax System (Goods and Services Tax) Act.
Careful regard to all of the provisions of that subsection must be had to ensure that every element that needs to be satisfied is able to be satisfied to claim the going concern exemption. If a going concern exemption is claimed but is not accepted by the ATO, it is the supplier that runs the liability risk of having to pay 1/11th of the consideration to the ATO.