Edited version of private ruling

Authorisation Number: 1011617284473

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Ruling

Subject: GST and purchase of retail business

Questions:

1. Will the acquisition of retail business by multiple purchasers under the sale and purchase agreement (Agreement), be a creditable acquisition by each of the purchasers under section 11-5 of the A New Tax System (Goods and Services Act) 1999 (GST Act)?

2. Will the payments between the vendor and the purchasers under the 'X Contracts' be outside the scope of the GST?

3. Will the difference between the 'actual stamp duty' and the 'estimated stamp duty' be a change to the consideration for the vendor's GST-free supply of a going concern?

4. (a) Will a payment by the purchasers in relation to an 'assumed liability' under the Agreement, be part of the consideration for the vendor's GST-free supply of a going concern?

(b) Will a purchaser be able to recover GST incurred on any expenditure in relation to the Assumed Liabilities after completion?

Answers:

1. No, the acquisition of retail business by multiple purchasers under the Agreement will not be a creditable acquisition by each of the purchasers under section 11-5 of the GST Act, provided that each respective part of the vendor's enterprise is capable of operating as a separate enterprise and the vendor is able to supply all the things necessary for the continued operation of each part of the retail enterprise.

2. Yes, the payments between the vendor and the purchasers under the 'X Contracts' will be outside the scope of the GST.

3. The treatment of the difference between the 'actual stamp duty' and the 'estimated stamp duty' will be a contractual matter subject to the agreement between the vendor and the purchasers. The Australian Taxation Office (ATO) cannot pronounce itself on contractual matters between entities.

4. (a) Yes, where the purchasers pay an amount of an assumed liability under the Agreement, this will be part of the consideration for the vendor's GST-free supply of a going concern.

(b) Yes, a purchaser will be able to recover GST incurred on any expenditure in relation to the Assumed Liabilities, where the acquisitions are made and paid for by that purchaser after completion.

Relevant facts:

You (include multiple entities within a group) are currently considering acquiring the retail business of an entity (the vendor). You are registered for goods and services tax (GST).

You already hold the required operating licences within various entities in the group. Therefore, you wish to acquire the respective parts of the vendor's retail business into different operating entities.

You have confirmed that the vendor will be supplying to each of you part of its larger retail enterprise. Consequently, each of you will be receiving all the things that are necessary for the continued operation of respective part of the vendor's retail enterprise.

The vendor will supply you the retail section of its enterprise.

As part of the vendor's retail activities, the vendor sells its product to customers within its specific area, as well as to customers in other areas.

The vendor operates its retail business through a management structure that is separate to its network business, has a system of internal user charging, a separate budget, and has agreements/arrangements with internal service providers.

The vendor has retail agreements with its customers which are separate from its other agreements.

The 'Assumed Liabilities' under the Agreement means all of the liabilities and obligations of the vendor under various business contracts.

The 'X Contract' under the Agreement mean a retail business contract in existence at completion that is not a transferable retail business contract.

Under a clause in the Agreement, consideration to be provided by the Purchaser for the purchase of the Assets will comprise:

· payment of the Purchase Price;

· assumption of the Assumed Liabilities;

· performance of its obligations in relation to employees of the vendor, and with regard to the close out of the vendor's position in certain financial instruments; and

· entry into the Ancillary Agreements.

A clause in the Agreement provides for the consideration for the supply, that the sale of the assets is the supply of a going concern and that the purchasers are registered, and will continue to be registered up to and including the day of supply by the vendor.

A clause in the Agreement provides for the vendor to arrange for the payment, on behalf of the purchaser, of any stamp duty and further responsibilities of the vendor in relation to the variations occur.

A clause in the Agreement provides that some assets of the vendor's retail business will not be supplied.

A clause in the Agreement also states that the suppler must conduct the retail business in the ordinary course and substantially in the same manner until the day of the supply.

Reasons for decision

Question 1

Will the acquisition of retail business by multiple purchasers under the Agreement, be a creditable acquisition by each of the purchasers under section 11-5 the GST Act?

Summary

The acquisition of the retail business by multiple purchasers under the Agreement will not be a creditable acquisition by each of the purchasers under section 11-5 of the GST Act, provided that each respective part of the vendor's enterprise is capable of operating as a separate enterprise and the vendor is able to supply all the things necessary for the continued operation of each part of the retail enterprise.

Detailed reasoning

Creditable acquisition

Section 11-5 of the GST Act provides that:

You make a creditable acquisition if:

· you acquired anything solely or partly for a *creditable purpose; and

· the supply of the thing to you is a *taxable supply; and

· you provide, or are liable to provide, *consideration for the supply; and

· you are *registered, or *required to be registered.

(the asterisk denotes a term defined in section 195-1 of the GST Act)

In your case, each of you will acquire the respective part of the vendor's larger retail business solely for a creditable purpose as you will be acquiring it in carrying on your enterprise. You will provide consideration for the acquisition and you are registered for GST. Therefore, it is necessary to consider whether the supply to you will be a taxable supply.

Taxable supply

Section 9-5 of the GST Act provides that:

You make a taxable supply if:

· you make the supply for *consideration; and

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

· the supply is *connected with Australia; and

· 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 your case, the supply of respective parts of the vendor's retail business to you will be for consideration, the supply will be made to you in the course of an enterprise carried on by the vendor, the vendor is registered for GST and the supply is connected with Australia. As such, the supply of the retail business will be a taxable supply under section 9 -5 of the GST Act, unless it is capable of being a GST-free supply under Division 38 of the GST Act or an input taxed supply under subdivision 40-C of the GST Act.

As the sale will be of a retail business, the supply to you will not be an input taxed supply. The provisions of the GST Act that are relevant in determining the nature of the supply to you are the GST-free going concern provisions, which are examined below.

Supply of a going concern

The 'supply of a going concern' is GST-free where the requirements of subsections 38-325(1) and 38-325(2) of the GST Act are met.

Requirements of subsection 38-325(1) of the GST Act

Subsection 38-325(1) of the GST Act states that a '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 for GST; and

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

Based on the facts made available to us, under the Agreement the supply is to be made for consideration, you and the vendor agree that the supply is the supply of a going concern and you are registered for GST purposes. Hence the requirements of subsection 38-325(1) of the GST Act will be satisfied.

Accordingly, the sale of each part of the retail business will be GST-free if the arrangement between you and the vendor will satisfy the requirements of a supply of a going concern under subsection 38-325(2) of the GST Act.

Requirements of subsection 38-325(2) of the GST Act

Subsection 38-325(2) of the GST Act states that a 'supply of a going concern' is a supply under an

Identified enterprise 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).

Goods and Services Tax Ruling Goods and services tax: when is a supply of a going concern GST-free? (GSTR 2002/5) provides the Commissioner's views on GST-free supplies of going concerns. GSTR 2002/5 states the following in regards to sale of a going concern which is part of a larger enterprise.

29. Subsection 38-325(2) of the GST Act requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply, whether or not as part of a larger enterprise.

30. Where the enterprise identified for the purpose of subsection 38-325(2) of the GST Act forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.

Accordingly, once the enterprise is identified, it is the supply in relation to that enterprise that must meet the requirements of subsection 38-325(2) of the GST Act.

The vendor operates its retail business through a management structure that is separate to its other business, has a system of internal user charging, has a separate budget, and has agreements/arrangements with internal service providers.

The vendor has retail agreements with its customers which are separate from its other agreements.

You state that any purchaser acquiring the vendor's retail business would need to hold certain licences. As you already hold the required operating licences within various entities in your group, you will be acquiring the respective parts of the vendor's retail enterprise into different operating entities. This spilt of the vendor's retail business will be necessary due to the required licences already being held by certain entities in your group.

Therefore it is necessary to consider whether each of those respective parts is an enterprise that is capable of being supplied as a going concern.

Under paragraph 9-20(1)(a) of the GST Act, an enterprise encompasses an activity or a series of activities done in the form of a business. To determine whether each part is capable of meeting the tests of a business, the chain of activities undertaken by each relevant part need to be considered against the indicators of a business outlined in paragraph 63 of the Miscellaneous Taxation Ruling MT 2000/1 (MT 2000/1). The main indicators of a business as identified in paragraph 63 of MT 2000/1 include:

· a significant commercial activity;

· an intention to make a profit from the activity;

· repetition and regularity of activity;

· commercial sales of a product; and

· size and scale of activity.

As stated in the facts, the separation of the business would be by State according to the type of products being provided. Further you advise that all of these parts would be businesses that are capable of separate operation and each separate transfer would give each of the purchasers all the things necessary to carry on the business. Accordingly, we view that they are part of a larger enterprise carried on by the vendor.

Paragraphs 30 and 40 of GSTR 2002/5 clearly recognise that a supply of an enterprise within a larger enterprise can be a supply of a going concern when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied to the purchaser.

Paragraph 131 of GSTR 2002/5 provides that supplies of all of the things that are necessary for the continued operation of parts of a larger enterprise may be separate supplies of going concerns to two or more recipients, provided the two or more different parts of the enterprise are each capable of separate independent operation.

Therefore, the 'identified enterprise' that will be supplied by the vendor in your case is each respective part of its larger retail enterprise.

All things necessary for the continued operation

Further, GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of the enterprise'.

In particular paragraph 74 of GSTR 2002/5 provides that a 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.

Paragraph 47 of GSTR 2002/5 states the term 'thing' is defined in section 195-1 of the GST Act as anything that can be supplied or imported.

Paragraph 72 of GSTR 2002/5 provides that the term 'necessary' incorporates the attributes of an enterprise that are essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. Paragraph 72 further specifies that the term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'.

Paragraph 75 of GSTR 2002/5 states that 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.

Assets

Under a clause in the Agreement the vendor will provide the following essential assets in respect of the retail business:

· goodwill of the vendor in or attaching to the retail business;

· customer contracts for the retail sale of the commodity (where relevant) by the vendor;

· the retail brands, being the business name and trade names; and

· books and records for retail business.

We agree that where the above assets are supplied to you, the vendor will have supplied all the assets necessary for the continued operation of the 'identified enterprise'.

By acquiring the retail business contracts, you will take over the vendor's retail business customers and its key product acquisition arrangements. Further, the vendor's supply of the retail business materials (that is, the books and records) to each of you indicates that you are acquiring the vendor's 'business structure and process' (being its' commercial or economic activity').

Premises

At paragraphs 90-91, GSTR 2002/5 provides that where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied for the continued operation of the enterprise.

Under a clause in the Agreement the vendor will be providing rights to the purchaser to use the vendor's premises for a certain period. Therefore, we agree that such arrangements will allow you to continue uninterrupted operation of the vendor's retail business on and from completion date. Provided, the vendor complies with this clause in the Agreement, this requirement will be satisfied.

Employees and intellectual property

Paragraphs 123-124 of GSTR 2002/5 provide that the continuity of employment of the existing workforce can be relevant in determining whether a supply is the supply of a going concern. In particular, paragraph 124 of GSTR 2002/5 provides that continued employment by the recipient of a significant portion of an existing workforce is consistent with the operating structure and processes of the supplier's enterprise having been supplied to the recipient.

Under a clause in the Agreement the purchaser is allowed to make an employment offer to each employee of the vendor engaged in the retail business as at the completion date, although the purchaser is not obliged to make employment offers to any particular employee, or any particular number of employees.

Under an ancillary agreement, a significant portion of the vendor's retail business employees will be available to provide key business services to you.

Further, paragraph 116 of GSTR 2002/5 stipulates that where intellectual property exists and is one of the things necessary for the continued operation of the identified enterprise, the benefit of the intellectual property must be supplied to the recipient under the arrangement.

In your case, the supply of the assets to each of you will include retail business intellectual property. Therefore, we agree that the intellectual property rights will effectively pass on to you as part of the supply of the vendor's retail business.

Assets not supplied to the Purchaser

As explained in paragraphs 84-86 of GSTR 2002/5, some things are not necessary for a supply to be a supply of a "going concern".

You advise that even though some of the vendor's assets will not be supplied, the services that the vendor will be providing to the purchaser through certain ancillary agreements will put the purchaser in a position to continue the operation of the retail business as if the assets were supplied.

Where the vendor has committed to enter into arrangements under which substantially similar rights will be created in favour of the purchaser; we accept that the relevant things for the continued operation of the identified enterprise will be supplied to you.

As defined under a clause in the Agreement, certain contracts (X Contracts) in existence at completion are not transferable to the purchaser on the completion date.

Under a clause in the Agreement, legal title to the X Contracts will be held by the vendor for the benefit, and at the risk of the purchaser until they are transferred.

The vendor is required to administer the X Contracts effectively on behalf of the purchaser, until such time the legal title in the X contracts passes to the purchaser. All key decisions in respect of the X Contracts are subject to the overriding control of the purchaser.

Provided that and the vendor complies with the clause in the Agreement mentioned above, the vendor will be able to supply to you those things necessary for the continued operation of the identified enterprise.

Further, the contracts for the purchase of wholesale products are considered "things... necessary for the continued operation" of the identified enterprise.

However, where there is no contract for the purchase of product for the vendor that can be transferred to the purchaser, a contract for the purchase of product from the market is not one of the things necessary to be supplied by the vendor for the continued operation of retail business.

As stated, the vendor will put the purchaser in a position to acquire the product from the market (to service its retail business) on and from completion date.

Based on the facts provided, a retailer must have a product retail licence. Hence, the holding of licences and authorisations is crucial to the carrying on of the identified enterprise.

The vendor will surrender its retail licences and authorisations in such cases, but only once all the X Contracts have been transferred to the purchaser.

Paragraphs 50 and 106 of GSTR 2002/5 state:

50. We are of the view that the surrender of the relevant licence, permit or quota should be taken to be the supply of that thing which is necessary for the continued operation of the enterprise in circumstances where it is highly probable that the licence, permit or quota will be automatically reissued by the relevant government or agency.

106. Alternatively, the supplier may know from past experience and industry practice that the relevant entity does not normally approve transfer. The supplier may therefore merely choose to surrender the licence, permit or other statutory authorisation and request that it be reissued to the recipient by the relevant entity. The surrender and reissue of the thing by the relevant entity will be taken to be a supply by the supplier for the purposes of section 38-325 of the GST Act.

Provided that the vendor surrenders its retail licences and authorisations, it will be regarded as the supply of a thing necessary for the continued operation of the identified enterprise.

As such, where each respective part of the larger retail enterprise of the vendor is capable of operating as a separate enterprise and where the vendor supplies to each of you all the things that are necessary for the continued operation of each part of the retail enterprise, we consider that the supply of the retail business under the arrangement to different entities in the group, will satisfy the requirements of paragraph 38-325(2)(a) of the GST Act.

Supplier carries on the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

Supplier carries on the enterprise until the day of the supply

141. A supply under an arrangement will only be the 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

Under paragraph 38-325(2)(b) of the GST Act a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on by the supplier until the day 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 of the things that are necessary for the continued operation of the enterprise (refer to paragraph 161 of GSTR 2002/5).

In your case, under a clause in the Agreement the vendor is required to conduct the retail business in the ordinary course and substantially in the same manner until the completion date.

Provided that, the vendor carries on the retail business operation until the day of the supply under the Agreement, we consider that the supply of the retail business under the arrangement, will satisfy the requirements of paragraph 38-325(2)(b) of the GST Act.

As such, the supply under the Agreement will ensure that each of you will be in a position to carry on the enterprise of retail business.

Accordingly, provided all the requirements of section 38-325 of the GST Act are satisfied, the supply of the vendor's retail business to you will be a supply of a going concern

Conclusion

Where the relevant supply to you satisfies all the requirements of a GST-free going concern, it fails to meet the requirement of paragraph 11-5(b) of the GST Act. Consequently, your purchase of the retail business from the vendor will not be a creditable acquisition.

Question 2

Will the payments between the vendor and the purchasers under the X Contracts be outside the scope of the GST?

Summary

The payments between the vendor and the purchasers under the X Contracts will be outside the scope of the GST.

Detailed reasoning

As defined under a clause in the Agreement, the X Contract is a retail business contract that is not transferable to the purchaser on the completion date. You state that instead, the beneficial interest in the contracts will be transferred to the purchaser. They are not transferable to the purchaser until they can be migrated in the purchaser's system.

A clause of the Agreement provides that legal title to the X Contracts will be held by the vendor for the benefit, and at the risk of the purchaser.

Another clause in the Agreement provides for payments between the vendor and the purchaser to be set-off in a way that only a net payment is made.

As you have stated, where a purchaser accounts for the GST on the supplies made by the vendor on behalf of the purchaser in respect of the X Contracts, we consider that payments of net amounts by the vendor to the purchaser (or vice versa) occur as a consequence of the transfer of economic benefits which will be supplied on the completion date.

In addition, for the payments between the vendor and the purchasers, in respect to the X Contracts, to come within the scope of GST, all of the criteria under section 9-5 of the GST Act need to be satisfied.

The agreements between the vendor and the purchasers provide that:

· the vendor has, with effect from the Effective Time, transferred all economic benefit of and risk in the X Contracts to the purchasers,

· legal title to the X Contracts will be held by the vendor for the benefit, and at the risk of the purchasers,

· the purchasers will receive the benefit of the vendor's rights, and bear the risk and cost of the vendor complying with its obligations, under the X Contracts,

· that purchasers provide the vendor with cleared funds sufficient to enable the vendor to satisfy any X Contracts liabilities by the relevant due date or with notice to the vendor,

· any amount payable by the vendor to each of the purchasers to be reduced by its set-off against any amounts which are due and payable by the purchasers to the vendor under any linked agreement.

The agreements allow money to pass from the vendor to the purchasers and vice versa so that liabilities are met.

The meaning of 'supply' is given in section 9-10 of the GST Act and is very broadly defined to be 'any form of supply whatsoever'.

Goods and Services Tax Ruling GSTR 2006/9 (GSTR 2006/9) provides guidance on the Commissioner's views on the meaning of the term 'supply' in the GST Act and includes a number of propositions for characterising supplies and analysing more complex transactions.

At paragraph 72, GSTR 2006/9 explains that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply.

As provided under the relevant arrangement, the payment is not consideration for any new supply by either party. Therefore, in your case we consider that no supply is made as nothing passes from the entities receiving the payment to the entity making the payment.

Consideration is defined in section 9-15 of the GST Act to include any payment in connection with, in response to, or for the inducement of a supply.

As there is no supply being made by the purchaser to the vendor, the necessary connection between the supply and consideration will not be found in these instances. Hence, the payments between you and the vendor in respect of the X Contracts are not subject to GST.

Question 3

Will the difference between the 'actual Stamp Duty' and the 'estimated Stamp Duty' be a change to the consideration for the vendor's GST-free "supply of a going concern?

Summary

The treatment of the difference between the 'actual Stamp Duty' and the 'estimated Stamp Duty' will be a contractual matter subject to the agreement between the vendor and the purchasers. The Australian Taxation Office cannot pronounce itself on contractual matters between entities.

Detailed reasoning

A clause in the Agreement states that on completion, the purchaser must pay the vendor the Completion Amount and the Estimated Stamp Duty. The purchaser has the statutory obligation to pay stamp duty and the vendor is to arrange for payment on behalf of the purchaser.

An amount of stamp duty is for a supply made by an Australian government agency to a customer, and it is a charge imposed under Australian laws and payable to Australian government agencies.

Goods and Services Tax Ruling GSTR 2000/37 (GSTR 2000/37) describes what is meant by principal/agent relationships. Paragraph 50 of GSTR 2000/37 provides that, among other things, fines, penalties, stamp duty and taxes are examples of common fees and charges, for which a client is liable, that may be paid for by a solicitor as a paying agent of the client.

Paragraph 49 of GSTR 2000/37 states:

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

A payment made by the vendor as agent on behalf of the purchaser, subject to the common law rules of agency, will be treated as if it were made by the purchaser.

A clause in the Agreement provides that the vendor will arrange for the payment on behalf of the purchaser, of any stamp duty assessed.

Therefore, in this case we consider that:

· there is an agency relationship between the vendor and the purchasers in relation to the payment of stamp duty; and

· any expense incurred by the vendor (regarding stamp duty) as an agent for the purchasers is an expense of the purchaser and is not part of the consideration for the supply of the identified enterprise.

A clause in the Agreement provides that the vendor will be responsible for any amount by which the actual Stamp Duty assessed under the Agreement exceeds the estimated Stamp Duty. Further, where the actual stamp duty exceeds the estimated stamp duty, the vendor will be contractually responsible, by virtue of a clause in the Agreement to remit an additional amount on behalf of the purchaser. You contend that the additional amount of stamp duty paid by the vendor on behalf of the purchaser under such circumstances will be a change to the consideration received by the vendor.

You further submit that under a clause in the Agreement the vendor will be entitled to retain any amount by which the estimated stamp duty exceeds the actual stamp duty assessed under the Agreement as an adjustment to the Purchase Price.

However, we view that the agreement between the vendor and a purchaser where any amount by which the actual stamp duty exceeds the estimated stamp duty, such amount is to be paid by the vendor on behalf of the purchaser, and that it is to be treated as a change in the consideration is a contractual agreement between the two parties. We advise that the ATO cannot rule on contractual matters between two entities.

Question 4(a)

Will a payment by the purchasers in relation to an assumed liability under the Agreement, be part of the consideration for the vendor's GST-free supply of a going concern?

Summary

Where the purchasers pay an amount of an assumed liability under the Agreement, this will be part of the consideration for the vendor's GST-free supply of a going concern.

Detailed reasoning

The assumed liabilities are defined under a clause in the Agreement to mean all of the liabilities and obligations of the vendor under various business contracts.

In this case, it needs to be determined whether the assumption of the liabilities as defined under thee Agreement forms part of the consideration for the supply.

Goods and Services Tax Ruling GSTR 2004/9 (GSTR 2004/9) provides the Commissioner's view regarding the GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise. GSTR 2004/9 distinguishes between the statutory liabilities imposed on the purchaser and the liabilities effectively assumed by the purchaser. 

Liabilities effectively assumed by the purchaser

At paragraphs 23-25, GSTR 2004/9 explains that a purchaser does not make a supply within the meaning of section 9-10 of the GST Act, or specifically within the meaning of paragraph 9-10(2)(g) of the GST Act, of an entry into an obligation, if the liability upon the purchaser is imposed, required and effected by the words of a statute.

Paragraphs 26-30 of GSTR 2004/9 discuss the GST consequences where liabilities are effectively assumed by the purchaser. A purchaser effectively assumes a liability of a vendor where the purchaser promises to the vendor that it will discharge, either immediately or in the future, the vendors liability to a third party.

In the present case, the liability to pay an amount in relation to the 'Assumed Liabilities' arises under a clause in the Agreement. The liability to make payment in respect of the 'Assumed Liabilities' is created by the Agreement and not by any statute.

Quantified and unquantified liabilities

GSTR 2004/9 then distinguishes between quantified and unquantified liabilities.

A quantified liability is an amount that can be quantified with certainty at the time it is assumed. If the liability assumed by the purchaser is quantifiable, it is part of the consideration for the supply of the enterprise and is expressed as an amount of money paid by the purchaser for the enterprise. The purchaser does not make a supply to the vendor in assuming the liability.

If a liability assumed by the purchaser is not quantifiable, then it is the provision of non-monetary consideration, if it has economic value and a separate independent identity. The GST-inclusive market value of the purchaser's promise to pay the vendor's unquantifiable liability forms part of the consideration for the supply of the enterprise. Paragraph 29 of GSTR 2004/9 explains that where the vendor and purchaser are dealing at arms length, a value agreed and allowed as a set-off in the calculation of the purchase price is likely to accurately represent the GST-inclusive market value.

Paragraph 56 of GSTR 2004/9 stipulates that if a purchaser acquires an enterprise and assumes an existing quantified liability of the vendor, the purchaser agrees to pay the purchase price to the vendor and to pay an amount directly to a creditor. In effect the purchaser's payment to the Vendor is monetary consideration for the supply of the enterprise and the payment to the creditor is also part of the consideration for the supply of the enterprise. Therefore, under paragraph 56 of GSTR 2004/9 the purchaser simply pays the purchase price, partly to the vendor at settlement and partly to the creditor (at the vendor's direction).

Paragraph 62 of GSTR 2004/9 states that if a purchaser acquires an enterprise and assumes an existing unquantified liability of the vendor, it agrees to pay the purchase price to the vendor and to pay an unspecified amount directly to a third party.

Paragraph 65 of GSTR 2004/9 specifies that if an enterprise is supplied, the nature of the transaction is the supply of all things necessary for the conduct of that enterprise. If a purchaser agrees to honour product warranty liabilities of the vendor this is merely a term or condition of the contract of sale. That is, the enterprise is supplied on the condition that the warranty liabilities are to be satisfied.

Under Paragraphs 30 and 67 of GSTR 2004/9 a purchaser does not make a supply if the purchaser agrees to assume an unquantified liability of the vendor, as a term or condition of the contract for the acquisition of the enterprise.

As provided under the Agreement the liability means any liability, whether actual or contingent, present or future, quantified or unquantified.

In this case, a purchaser does not make a supply to the vendor in assuming the liability. Therefore, where the vendor supplies part of its retail enterprise as a GST-free supply of a going concern, the assumed liability will be part of the consideration for the supply of that identified enterprise.

Question 4(b)

Will a purchaser be able to recover GST incurred on any expenditure after completion in relation to the Assumed Liabilities?

Summary

A purchaser will be able to recover GST incurred on any expenditure in relation to the Assumed Liabilities, where the acquisitions are made and paid for by that purchaser after completion.

Detailed reasoning

Ongoing Assumed liabilities

These are not in relation to acquisitions made by the vendor prior to completion and paid for by the purchaser, but the acquisitions made and paid for by the purchasers after completion in connection with the Assumed Liabilities of the business.

Paragraph 18 of GSTR 2004/9 confirms the Commissioner's view that an agreement between a vendor and purchaser for the transfer of a liability to the purchaser, without the consent of the creditor, has the practical effect of assigning the obligation. Although not legally released from the obligation, the vendor is effectively released because of the contractual promise by the purchaser to the vendor to pay the liability, and the indemnity provided in conjunction with the promise. This type of assumption is referred to as an 'effective assumption'.

According to paragraph 116 of GSTR 2004/9, the future amounts to be paid to a third party under an assigned agreement do not form part of the consideration for the supply by the vendor. The payments are for the third party's ongoing performance of the agreement of the purchaser. The ongoing payments do not have a sufficient nexus with the supply of the enterprise by the vendor.

In your case, the payments to third parties for the on-going Assumed Liabilities post completion of the supply are not for acquisitions made by the vendor. We agree that effective assumption of such contractual obligation by the purchaser has the effect of making the purchaser the recipient of the supply.

Accordingly, these payments have a nexus with the third party's ongoing performance of the agreement of a purchaser after completion. Such acquisitions will be creditable acquisitions under section 11-5 of the GST Act and a purchaser will be entitled to claim input tax credits under section 11-20 of the GST Act.

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