1011591065010 | Legal database

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Edited version of private ruling

Authorisation Number: 1011591065010

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Ruling

Subject: GST and sale of business

Question

Is the sale of your business the GST-free supply of a going concern under the A New Tax system (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the sale of your business is not the GST-free supply of a going concern as paragraph 38-325(1)( c) of the GST Act is not satisfied.

Relevant facts

You carried on a business of buying wholesale products for selling to retailers (the business).

You were registered for GST.

You sold the business to another entity last year after having operated it for the last few years.

You are not associated with the other entity.

The only assets sold with the business were the inventory of wholesale products.

You believe the transfer of the inventory to the other entity would be sufficient for continued operation of the business.

You advised that an invoice was raised at the time of sale, but there was no formal sale agreement between you and the other entity.

You and the other entity entered into a sale agreement that was signed approximately two weeks after the date of sale. The agreement provided that:

· you and the other entity agree that ' the supply of inventory pursuant to this agreement is a supply of a going concern for the purposes of section 38-325 of the GST Act…';

· you will supply all of the things necessary for the continued operation of the enterprise;

· you will carry on the enterprise until the day of the supply;

· the supply is for consideration;

· the other entity 'warrants that it is registered or required to be registered for GST'.

You further advised that:

· you were carrying on the business until the date it was sold, although you had transferred some parts of it to the other entity before the sale;

· in addition to the inventory, you also provided the other entity with contact details for retailers and a list of debtors;

· no licences were required to operate the business;

· the inventory was stored in your home garage which the other entity also has access too.

· you did not employ any other staff to operate the business

Reasons for decision

Taxable Supply

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

· it makes a supply for consideration; and

· the supply is in the course or furtherance of an enterprise that it carries on; and

· the supply is connected with Australia; and

· the entity is registered or required to be registered for GST.

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

From the information received, the supply of your business to the other entity satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act. However, your supply is not a taxable supply to the extent that it is GST-free or input taxed. There is no provision in the GST Act that makes your supplies input taxed.

GST-free supply

Relevant to your supply is section 38-325 of the GST Act. The supply will be a GST-free supply of a going concern where all the requirements of section 38-325 of the GST Act are met.

Under subsection 38-325(1) of the GST Act the 'supply of a going concern' is 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.

For a supply to be a 'supply of a going concern', subsection 38-325(2) of the GST Act provides that the supply must be made under an arrangement under which:

· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

· the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) explains when a supply is a supply of a going concern for the purposes of section 38-325 of the GST Act

We shall now consider whether your situation meets all the requirements of subsection 38-325(1) of the GST Act.

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration.

The consideration for the supply of the business was set out in an invoice issued to the other entity on the date of sale of the business.

We consider that the supply is made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or required to be registered for GST.

We consider that this requirement is fulfilled as the sale agreement includes a warranty from the other entity that they are registered or required to be registered for GST.

Agreed in writing

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a supply of a going concern (refer paragraph 181 of GSTR 2002/5). Your sale agreement with The other entity meets this requirement.

However, it is the ATO's view that the supplier and the recipient must agree that the supply is 'a supply of a going concern' on or before the day of the supply (refer paragraph 182 of GSTR 2002/5).

As your sale agreement was made after the sale, that is approximately 14 days later, we do not consider that you and the other entity have agreed in writing that the supply of the business is the supply of a going concern at the time of the sale for the purposes of section 38-325 of the GST Act.

Accordingly, as you do not meet the requirements of paragraph 38-325(1)(c) the sale of the business to the other entity will not be a GST-free supply. Your supply will be a taxable supply under section 9-5 of the GST Act

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