Edited version of private ruling

Authorisation Number: 1011567669180

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Ruling

Subject: Sale of a going concern and input tax credits

Question

Are you entitled to input tax credits on your acquisition?

Answer

No, you are not entitled to input tax credits on your acquisition.

Relevant facts and circumstances

You are an Australian entity, you operate an enterprise and are registered for goods and services tax (GST).

You entered into a contract to acquire an enterprise.

You and the vendor agreed in writing that the sale was of a going concern.

Under the contract, the vendor supplied everything necessary for the continued operation of the enterprise.

The vendor continued to operate the enterprise in the period up to settlement.

On settlement date everything necessary for the continued operation of the enterprise was transferred to you.

You continued to operate the enterprise using the same suppliers, consultants and contractors who worked for the vendor.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-30,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1,

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325(1) and

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325(2).

Reasons for decision

According to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(*denotes a term defined under section 195-1 of the GST Act)

Subsection 11-15(1) of the GST Act states that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, pursuant to subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

(b) the acquisition is of a private or domestic nature.

In your case, you have made an acquisition for a creditable purpose as no part of the acquisition is of a private or domestic nature or relates to making input taxed supplies. You have provided consideration for the supply and are registered for GST. As such, the acquisition met the requirements of paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act.

Therefore, what is left to be determined is whether the supply of the enterprise to you was a taxable supply as required by paragraph 11-5(b) of the GST Act.

Whether the sale to you was a taxable supply

Whether or not a supply is a taxable supply depends on the circumstances of the supplier. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

In this case, based on the information provided, the requirements of paragraphs

9-5(a) to 9-5(d) of the GST Act will be met. This is because the vendor sold for consideration, the supply was made in the course or furtherance of an enterprise that the vendor carried on, the sale was connected with Australia and the vendor is registered for GST.

The sale was not input taxed under any provision of the GST Act. Therefore, it must be determined whether the sale was GST-free.

Whether the sale to you was a GST-free supply

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is

GST-free under Division 38 of the GST Act, or under a provision of another Act.

Subdivision 38-J of the GST Act provides that, if certain conditions are satisfied, a supply of a going concern is GST-free. This means that, in the case of a supply which would otherwise be a taxable supply, or an input taxed supply, the supply is GST-free if it is supplied under an arrangement for the supply of a going concern.

Section 38-325 of the GST Act states:

(1) The *supply of a going concern is GST-free if:

(a) the supply is for *consideration; and

(b) the *recipient is *registered or *required to be registered; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

(1) 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).

Supply of a going concern

In order to determine whether the sale was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act).

'Business' is defined in section 195-1 of the GST Act to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

In this case, the vendor was carrying on a business. This was the enterprise identified for the purposes of subsection 38-325(2) of the GST Act. Therefore, the vendor was required to supply to you all of the things that are necessary for the continued operation of this enterprise.

Goods and Services Tax Ruling GSTR 2002/5 explains what is 'a supply of a going concern' for the purposes of section 38-325 of the GST Act, and when the 'supply of a going concern' is GST-free.

Paragraphs 72 and 73 of GSTR 2002/5 provide that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Furthermore, paragraph 75 of GSTR 2002/5 states:

Two elements are essential for the continued operation of an enterprise:

· the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

· the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

In your case, the contract provided that the vendor will supply everything necessary for the continued operation of the enterprise to you on the settlement date:

Furthermore, as stated in paragraph 80 of GSTR 2002/5:

80. The supplier supplies all of the things that are necessary for the continued operation of an enterprise when the supplier supplies those things which will put the recipient in a position to carry on the enterprise, if it chooses.

Based on the information provided, we consider that all of the things necessary for the continued operation of the enterprise were supplied by the vendor to you on the settlement date. This is because the vendor supplied to you all the assets (as listed), the operating structure and processes essential for the continued operation of the enterprise, if you choose to do so. As such, the requirements of paragraph 38-325(2)(a) of the GST Act were met.

The day of the supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all the things that are necessary for the continued operation of the enterprise.

Accordingly, we consider that the supply of the enterprise to you was be made under an arrangement that satisfied the requirements of subsection 38-325(2) of the GST Act. Therefore, the sale of the enterprise was a supply of a going concern.

GST-free supply of a going concern

In this case, the supply of the enterprise was for consideration, you are registered for GST, and you and the vendor agreed in writing that the supply was of a going concern. As such, the supply met all the requirements of subsection 38-325(1) of the GST Act.

Accordingly, the sale was a GST-free supply of a going concern as it met all the requirements of section 38-325 of the GST Act.

As the supply of the enterprise was not a taxable supply to you, the requirement of paragraph 11-5(b) of the GST Act was not met. Consequently, as the acquisition did not meet all the requirements of section 11-5 of the GST Act, you have not made a creditable acquisition and therefore will not be entitled to an input tax credit in respect of the purchase of the enterprise.

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