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Ruling

Subject: GST and creditable acquisitions

Question 1

Did the Purchaser make creditable acquisitions when it purchased Business 1 and Business 2 (both defined below) from Vendor 1 and Vendor 2?

Answer

No.

Relevant facts and circumstances

Acquisition of Business 1 from Vendor 1

The Purchaser purchased from Vendor 1 an enterprise of the importation, distribution and marketing of specialty goods and other similar products (Business 1). Vendor 1 wished to sell to the Purchaser and the Purchaser wished to buy from Vendor 1, Business 1 on the terms and conditions set out in the Deed of Sale of Business (Contract 1). Pursuant to the terms of Contract 1, Vendor 1 sold the following assets (Assets) that are required to carry on Business 1 to the Purchaser, including:

· the Stock;

· the Owned Plant and Equipment;

· paid out equity in the motor vehicles;

· the Intellectual Property;

· the IT Systems;

· all of the rights and obligations of Vendor 1 under or arising out of the Material Contracts (e.g. Accounts Receivable and Accounts Payable);

· all Records;

· all of the rights of Vendor 1 relating to deposits and prepaid expenses, claims for refunds and rights of offset in respect thereof;

· the Licences held by Vendor 1, to the extent they may be transferred to the Purchaser; and

· the Goodwill of Business 1.

Some specific assets owned by Vendor 1 were not transferred to the Purchaser at Completion. However, you note that these assets are not necessary to continue carrying on Business 1.

Both Vendor 1 and the Purchaser are registered for GST purposes and were registered at all relevant times. As a condition of sale, the leased premises used to operate Vendor 1's business were made available to the Purchaser immediately after the sale. At completion, Vendor 1, as a matter of fact, supplied the assets necessary for the continuation of Business 1, including those assets listed above. The supply was for consideration calculated in Contract 1.

The Parties have agreed in writing that the supply of Business 1 would be a supply of a GST-free going concern and Vendor 1:

· would supply to the Purchaser all things necessary for the continued operation of Business 1; and

· undertook to carry on operation of Business 1 until completion of Contract 1.

Acquisition of Business 2 from Vendor 2

Vendor 2 wished to sell to the Purchaser and the Purchaser wished to buy from Vendor 2, Business 2 on the terms and conditions set out in the Deed of Sale of Business (Contract 2). Pursuant to the terms of Contract 2, Vendor 2 sold the following assets (Assets) that are required to carry on Business 2 to the Purchaser, including:

· the Stock;

· the Owned Plant and Equipment;

· paid out equity in the motor vehicles;

· the Intellectual Property;

· the IT Systems;

· all of the rights and obligations of Vendor 2 under or arising out of the Material Contracts (e.g. Accounts Receivable and Accounts Payable);

· all Records;

· all of the rights of Vendor 2 relating to deposits and prepaid expenses, claims for refunds and rights of offset in respect thereof;

· the Licences held by Vendor 2, to the extent they may be transferred to the Purchaser; and

· the Goodwill of Business 2.

Specific assets owned by Vendor 2 were not transferred to the Purchaser at Completion. However, you note that these assets were not necessary to continue carrying on Business 2.

Both Vendor 2 and the Purchaser are registered for GST purposes and were registered at all relevant times. As a number of executive staff who possessed intellectual properly necessary for the continued operation of Business 2 were not transferred to the Purchaser at completion, those executive staff, as a condition of the sale, worked with the Purchaser to facilitate Vendor 2's transfer of knowledge and intellectual property to the Purchaser (as per the Services Agreement in Contract 2), Employees of Business 2 were generally transferred.

As a Condition Precedent, Vendor 2 obtained written approval to assign the leased premises in two sites, from which the enterprise is run, to the Purchaser. The lease in respect of the office was assigned to the Purchaser at Completion.

At completion, Vendor 2, as a matter of fact, supplied the assets necessary for the continuation of Business 2, including those assets listed above. The supply was for consideration calculated as per Contract 2.

The Parties agreed in writing that the supply of Business 2 would be a supply of a GST-free going concern and Vendor 2;

· would supply to the Purchaser all things necessary for the continued operation of Business 2; and

· undertook to carry on operation of Business 2 until completion of Contract 2.

Both Vendor 1 and Vendor 2 have sought and received GST private binding rulings confirming that their respective supplies were GST-free supplies of going concerns.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The Purchaser was not entitled to claim input tax credits on its acquisitions of Business 1 and Business 2 from Vendor 1 and Vendor 2. Both acquisitions were an acquisition of a supply of a GST-free supply of a going concern. An acquisition of a GST-free supply does not give rise to an input tax credit entitlement.

Detailed reasoning

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that a creditable acquisition is an acquisition where:

· you acquire 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 for GST.

The salient issue for the Purchaser is whether the two supplies were taxable supplies, if the supplies were either GST-free, input taxed or non-taxable for some other reason, the corresponding acquisitions could not be creditable acquisitions.

A supply of a going concern is a GST-free supply under section 38-325 of the GST Act:

(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).

We consider that both Vendor 1 and Vendor 2 in selling Business 1 and Business made their respective supplies for consideration and agreed with the Purchaser in writing that the supplies were supplies of going concerns.

Further we consider that the Purchaser was registered for GST at the time of its acquisitions.

Finally we consider that Vendor 1 and Vendor 2 supplied the Purchaser with all of the things necessary for the continued operation of Business 1 and Business 2 and that the Vendors carried on their respective enterprises until the day of supply.

Therefore both Vendor 1's and Vendor 2's supply were correctly treated as being GST-free under section 38-325 of the GST Act. In acquiring GST-free supplies, the purchaser could not make a creditable acquisition.

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