Edited version of private ruling

Authorisation Number: 1011748635535

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Ruling

Subject: GST and purchase of business assets

Question:

Will your acquisition of the assets of a business be a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

No, your acquisition of the assets of a business will not be a creditable acquisition under section 11-5 of the GST Act because it is not be a taxable supply to you.

The supply to you will be a supply of a going concern and will be GST-free under section 38-325 of the GST Act.

Relevant facts:

You, an entity, are registered for goods and services tax (GST).

You are purchasing assets of a business which include goodwill, stock and equipment.

You will be operating the exact same business at premises located in a different state or territory, under the exact same operating procedures. The vendor has made arrangements for the required premises to be made available to you and for the business to be conducted from premises in both states.

You will continue to trade with the existing customers under the exact same terms and conditions of business. The stock supplied and ordered are exactly the same as previously supplied by the vendor.

You have received management training at the vendor's premises.

The vendor is registered for GST.

A clause in the sale contract provides for the release of a full-time employee from close of business on the completion date to be available to work, whether as an employee or independent contractor, for you.

The parties have agreed that the sale of the assets is a sale of a going concern.

The vendor will carry on the business in the usual and ordinary course as regards its nature, scope and manner until the day of supply.

The vendor will assign customer contracts, supply contracts and intellectual property licences to you on completion date.

You are only responsible for liabilities incurred from the completion date.

Reasons for decision

Creditable acquisition

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquired anything solely or partly for a *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.

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

Based on the information provided in your case, you will be acquiring the assets of a business solely for a creditable purpose as you acquire it to carry on that business. You will provide consideration for the acquisition and you are registered for GST. What remains to be determined is whether the supply will be a taxable supply to you.

Taxable supply

The sale of assets of a business will be subject to GST if it is a taxable supply under section 9-5 of the GST Act.

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 your case, the supply of the assets of the business to you will be for consideration, it 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 the vendor's business is carried on in Australia.

The supply of the assets of the business to you by the vendor will meet paragraphs 9-5(a) to (d) of the GST Act and will be a taxable supply, unless this supply is GST-free or an input taxed supply under division 40 of the GST Act.

In this case, the supply will not be an input taxed supply under any of the provisions in the GST Act. Therefore we need to consider whether the supply of assets of the business, under the given circumstances, will be GST-free.

Supply of a going concern

A supply of a going concern is GST-free where it meets the requirements of section 38-325 of the GST Act.

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.

(2) 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 a part of a larger enterprise carried on by the supplier).

The above going concern provisions are to be considered from the perspective of the supplier.

In order to determine whether the sale of the assets of the business in the circumstances described is a GST-free supply of a going concern, firstly we need to consider whether, under this arrangement, the sale is capable of being a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 19 and 20 of Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) provide that the term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required to be entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made.

In this case, the sale agreement, including the arrangement in place constituted an arrangement for the purposes of subsection 38-325(2) of the GST Act.

Paragraph 29 of GSTR 2002/5 explains that 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'). 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.

In this case, the activity conducted by the vendor constitutes an enterprise for the purposes of section 9-20 of the GST Act. Accordingly, this is the identified enterprise for the purposes of subsection 38-325(2) of the GST Act.

Pursuant to a clause in the sale agreement, the vendor must carry on the enterprise until the day of supply. Thus, this satisfies the requirements of paragraph 38-325(2)(b) of the GST Act. It then remains to be determined whether the supply is under an arrangement under which the supplier supplies all the things that are necessary for the continued operation of the enterprise.

Goods and Services Tax Ruling GSTR 2002/5 (GSTR 2002/5) considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' as stated in paragraph 38-325(2)(a) of the GST Act. In particular, paragraphs 73 to 75 of GSTR 2005 state:

73. A thing is necessary for the continued operation of an identified enterprise if the enterprise could not be operated by the recipient in the absence of the thing. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

74. The supplier is required to supply to the recipient all of the things that are necessary to carry on the identified enterprise so that the recipient is put in a position to carry on the enterprise if it chooses.

75. 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.

As mentioned above, one of the assets necessary for the continued operation of an enterprise includes, where appropriate, premises.

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

Paragraph 91 of GSTR 2002/5 provides that where an enterprise is necessarily conducted from premises but particular premises are not necessary, then suitable premises, or the right to occupy such premises, must be supplied as one of the things that are necessary for the continued operation of the enterprise.

In your case, the required premises will be made available to you by the vendor, under the arrangement.

You have received management training from the vendor and the full-time employee is available to work as an employee or independent contractor for you on completion date.

The vendor will assign to you customer contracts, supply contracts and intellectual property licences to you on completion date.

You are only responsible for liabilities incurred from the completion date.

Based on the above, we consider that the vendor will be suppling to you all of the things that are necessary for the continued operation of the identified enterprise. Therefore, the sale of the assets of the business by the vendor to you will meet the requirement in paragraph 38-325(2)(a) of the GST Act. As such, the sale of the assets of the business by the vendor will be a supply of a going concern under subsection 38-325(2) of the GST Act.

The supply to you is for consideration, you are registered for GST and you and the supplier have agreed in writing that the supply is of a going concern. As such, you have satisfied all the requirements under subsection 38-325(1) of the GST Act. Hence the sale of the assets of the business to you will be a GST-free supply of a going concern under subsection 38-325(1) of the GST Act.

Therefore, the sale of the assets of the business to you will not be a taxable supply under section 9-5 of the GST Act as it will be GST free under subsection 38-325(1) of the GST Act. As such, your acquisition does not meet all the requirements of section 11-5 of the GST Act. It will not be a creditable acquisition under section 11-5 of the GST Act.

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