Supplies of going concerns are covered by subdivision 38-J of the GST Act which mainly affects disposal of businesses or disposal of commercial properties. Under that subdivision, a supply of a going concern will be GST-free if the supply is for consideration, 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 legislation then goes on to say that "a supply of a going concern" is defined to mean a supply under an arrangement which:

1. the supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise; and
2. the supplier carries on or will carry on the enterprise until the day of supply (whether or not as a part of a larger enterprise carried on by the supplier).

Whilst the application of the GST concession may appear to be straight forward at first instance, it is not so clear what is meant by "all the things necessary for the continued operation of an enterprise" and what the supplier must include in its supply for it to be GST-free.

In July 2001, the Australian Taxation Office issued a public ruling (GSTR 2001/5) in an attempt to clarify this issue. The kinds of things that a supplier needs to supply to a purchaser to ensure the continued operation of an enterprise depends on the enterprise or business being carried on. Under the ruling, the Commissioner of Taxation has stated that generally a ‘thing’ must be supplied to the purchaser if the enterprise or business could not be operated without that thing.

The ruling is flawed in that a ‘thing’ must be supplied for the concession to apply even if the supplier has no legal power to supply the ‘thing’! Two examples from the ruling are employment contracts and statutory licences.

The Commissioner regards the benefit of an employment contract as a thing that may be necessary for the continued operation of an enterprise. In particular, where businesses and other enterprises rely on key employees for their continued operation, the supplier is required to supply those key employees as part of the business. However, at law the assignment of an employment contract cannot be done. Requiring employment contracts to be assigned, where the law does not provide a mechanism for this, makes the practical application of this requirement very difficult.

Key employees of the enterprise or business sold may continue to work for the purchaser if they choose to do so. However, where the employee chooses not to do so, the supplier of the going concern has no power to legally force the employee to work for the purchaser. Under GSTR 2001/5, the Commissioner will deny the supplier from claiming GST concession under subdivision 38-J, despite the lack of legal power to supply the key employee.

Where a business or enterprise requires a statutory licence to operate, GSTR 2001/5 requires the surrender of the licence and the re-issue of the licence by the relevant authority to the purchaser for the supply of the going concern to attract the concession under subdivision 38-J. The Commissioner states that where the authority refuses to issue the required licence for the continued operation of the business, there cannot be a "supply of a going concern".

The supplier can never be sure that a statutory authority will supply the necessary licence for the continued operation of the enterprise and hence will never be sure whether their supply of a going concern will be GST-free.