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Edited version of private ruling
Authorisation Number: 1011842976020
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Ruling
Subject: GST and supply of a going concern
Question
Is the sale of the business a GST-free supply of a going concern where the premises are not supplied as part of the sale?
Answer
No. The sale of the business is not a GST-free supply of a going concern where the premises are not supplied. The sale of the business is a taxable supply.
Facts
You recently sold your retail business.
The sale agreement includes the transfer of goodwill, stock, plant and equipment.
The business had been conducted up to the date of sale from warehouse premises. However, as the purchaser has their own premises from which they operate another business, they did not require the supply of the premises. The purchaser intended to relocate the business to their existing premises.
Your usual level of stock is approximately $A and your annual sales is $B.
The stock at the date of sale had been reduced to $C.
The sale agreement provides that both parties agree that the sale of the business is a GST-free supply of a going concern.
GST was not included in the sale price. However, the sale agreement also provides that if the ATO determines that GST is payable on the sale then the purchaser has to pay an additional amount equal to the GST.
You are registered for GST.
The purchaser is an unrelated entity and is registered for GST.
Reasons for decision
GST is payable on the supply of your business if you are making a taxable supply.
Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 for GST.
However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.
(* denotes a term defined in section 195-1 of the GST Act.)
Based on the information provided, you satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:
(a) you supply your business for consideration
(b) the supply of your business is in the course or furtherance of your enterprise
(c) the supply of your business is connected with Australia, and
(d) you are registered for GST.
The supply of your business is not input taxed under the GST Act. Therefore, it remains to be determined whether the supply is GST-free.
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.
(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).
In order to determine whether the sale of your business is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale of your business is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.
Goods and Services Tax Ruling 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, 74 and 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 would include, where appropriate, premises. Paragraphs 90 to 99 of GSTR 2002/5 discuss premises that are necessary. In particular paragraphs 91 and 92 of GSTR 2002/5 state:
91. 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. Where premises are necessary for the continued conduct of the enterprise and premises are not supplied by the supplier because the recipient has, or is able to secure, suitable premises prior to the day of the supply, the supplier is not supplying a thing which is necessary for the continued operation of an enterprise.
92. In limited circumstances, an enterprise may not need to operate from premises and therefore premises are not one of the things necessary for the continued operation of that enterprise. This is the case where an enterprise requires few tangible assets, for example, a personal fitness trainer who visits clients and does not need any premises to operate the enterprise.
Paragraphs 94 and 95 of GSTR 2002/5 contains an example when premises are necessary for the continued operation of an enterprise.
In your case, you are carrying on a retail business. The sale agreement includes the transfer of goodwill, stock, plant and equipment. The business had been conducted up to the date of sale from warehouse premises.
As your business is the sale of goods, your business requires premises to store your stock. Therefore, premises are necessary to conduct your business.
However, you are not supplying your premises as the purchaser has their own premises from which they intended to relocate the business.
As you are not supplying premises to the purchaser, you are not supplying all of the things that are necessary for the continued operation of your business. Consequently, the sale of your business does not meet the requirements in paragraph 38-325(2)(a) of the GST Act. Hence, the sale of your business is not a supply of a going concern under subsection 38-325(2) of the GST Act.
Accordingly, the sale of your business is not a GST-free supply of a going concern under subsection 38-325(1) of the GST Act.
Furthermore, the sale of your business is not GST-free under any other provisions in the GST Act or another Act.
Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the sale of your business is a taxable supply. Hence, GST is payable on the sale.
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