GST – FINAL RULING ON SALES OF 'GOING CONCERNS'

The Australian Tax Office recently released its final ruling on when a supply of a going concern will be 'GST Free', being GST Ruling 2001/5.

It is important to note that this Ruling will apply retroactively from 1 July 2000 and will apply to sales of a 'going concern' which have already been completed.

The ordinary meaning of the term 'going concern', which is often used in reference to the activity of a business, will not always correspond to the definition in the GST Act. Under the GST Act, the supply of a going concern is GST Free if:

1. the supply is of all of the things that are necessary for the continued operation of an enterprise;
2. the supplier carries on the enterprise until the day of the supply;
3. the supply is for consideration;
4. the recipient is registered or required to be registered; and
5. the supplier and the recipient have agreed in writing that the supply is of a going concern.

The following important issues arise from the ruling.

• The supply must be of all of the things that are necessary to carry on the enterprise being sold. This may include premises, plant and equipment, stock-in-trade, intangible assets (such as goodwill, contracts, licenses and quotas) and the operating structure and process of the enterprise (for example, ongoing advertising and promotion).
• A sale of tenanted commercial premises will generally be GST Free as a going concern. However, there are limitations on when a partially tenanted building will amount to a going concern, and a sale with a leaseback arrangement will generally not be a going concern.
• A sale of a going concern with more than one purchaser or more than one vendor may not be GST Free. For example, fairly common arrangements where land is transferred to one company and the assets to another related company will not, unless carefully structured, be GST Free.
• The supplier and the recipient of the going concern must agree in writing that the supply is a 'supply of a going concern'. This must happen on or before the time of the supply.
• An option to purchase a going concern may also be GST Free.
• A sale of a partnership interest will generally not be the 'supply of a going concern'.
• The supply of all of the shares in a company that conducts an enterprise is generally not the 'supply of a going concern', although it may be an input taxed financial supply.
• Where an enterprise is conducted under a trust arrangement, it is only the trustee of the trust (as the entity conducting the enterprise) which may make a 'supply of a going concern'.
• A supply of property by a mortgagee will only be GST Free as a 'supply of a going concern' in limited circumstances.

It should be noted that other exemptions may apply in part to the sale of assets which do not meet the 'going concern' exemption may nevertheless be partially GST Free under a different provision, such as the farm land exemption.

If you have any concerns in relation to the GST treatment of a sale of business arrangement which you have treated as GST Free under the 'going concern' exemption, or any upcoming arrangements which you are considering, please seek legal advice as to the impact that this ruling may have on your tax liability.

In association with various industry bodies, Norman Waterhouse will be conducting seminars in September and October 2001 on the application of GST Ruling 2001/5 and the GST legislation to the sale of going concerns. If you are interested in attending one of these seminars, or for further information about issues covered in this article or any aspect of the GST legislation and its application please contact Kim Evans on +61 8 8210 1287 or by e-mail at kevans@normans.com.au

The contents of this newsletter are for information only and should not be taken as advice on the law. This newsletter may be reproduced in whole or in part with the prior permission of Norman Waterhouse an acknowledgment of its source and copyright.

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