Edited version of your written advice

Authorisation Number: 1012799284545

Ruling

Subject: Goods and services tax (GST) and supplies of going concerns

Question

Are you entitled to an input tax credit on your purchase of the vendor's business activity carried on in the relevant territory?

Answer

You will be entitled to an input tax credit on your purchase of the business activity carried on in the relevant territory unless the parties agree in writing that the sale of this business activity is the supply of a going concern.

The input tax credit (if applicable) would be 1/11^th of the total amount you pay the vendor under the sale agreement.

Relevant facts and circumstances

You are registered for GST.

You have entered into an agreement to purchase a business activity from X (the vendor), trading as (trading name).

You will purchase a territory from the vendor which covers certain areas.

The vendor operates their business in many territories.

The things used by the vendor in operating their business in the territory to be sold to you are the plant and equipment; premises located in certain areas, trading name and phone number. The premises are integral to the business activity. The premises are currently being leased to the vendor by a third party.

The vendor will supply to you the plant and equipment used in the territory to be sold to you; the right to use the trading name and phone number.

The vendor will assign its leasing interest in the relevant premises to you.

The vendor will enter into a franchise agreement with you. The vendor will be the franchisor under that agreement. Under your agreement with the vendor, no one but you will be allowed to operate under the (trading name) trading name in the territory to be sold to you.

The vendor will carry on its business in the relevant territory up to the time of sale of the relevant territory to you. You will be able to continue operating the vendor's business activity in the relevant territory from the time of sale of this activity using the things that the vendor supplies to you and you will do so.

You and the vendor have not agreed in writing that the sale of the activity to you is the supply of a going concern. The vendor considers that it is not supplying a going concern to you because it is only supplying a territory.

The vendor is registered for GST.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

Reasons for decision

Summary

If the parties agree in writing that the sale of the vendor's business activity conducted in the territory to be sold to you is a supply of a going concern, the vendor would make a GST-free supply of a going concern to you. Under such circumstances, you would not be entitled to an input tax credit because the supply would not be taxable.

If the parties do not agree in writing that the sale of the vendor's business activity conducted in the territory to be sold to you is the supply of a going concern, you will receive a taxable supply. Under such circumstances, you would be entitled to an input tax credit because you would meet the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition if you meet the requirements of section 11-5 of the GST Act, which states:

You make a creditable acquisition if:

(a) you acquire 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 for GST.

(*Denotes a term defined in section 195-1 of the GST Act)

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, subsection 11-15(2) of the GST Act provides that you do not acquire a thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

(b) the acquisition is of a private or domestic nature.

You will acquire a business activity in carrying on your enterprise and this acquisition will not relate to making input taxed supplies and the acquisition will not be of a private or domestic nature. Hence, you will acquire the business activity for a creditable purpose. Therefore, you meet the requirement of paragraph 11-5(a) of the GST Act.

You will provide consideration for the supply of the enterprise. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act

You are registered for GST. Therefore, you meet the requirement of paragraph 11-5(d) of the GST Act.

Therefore, what remains to be determined is whether a taxable supply will be made to you.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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.

The vendor in your case meets the requirements of paragraph 9-5(a) to 9-5(d) of the GST Act. This is because:

• it is supplying a business activity to you for consideration

• the supply will be made in the course or furtherance of an enterprise that the vendor carries on

• the supply is connected with Australia, and

• the vendor is registered for GST.

There are no provisions in the GST Act under which the sale of the business activity will be input taxed.

Therefore, what remains to be determined is whether the sale will be GST-free.

A sale of a going concern is GST-free if the requirements of subsection 38-325(1) of the GST Act are met. There are no other provisions of the GST Act under which the sale will be GST-free.

Subsection 38-325(2) of the GST Act defines going concern. It states:

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).

Paragraph 38-325(2)(b) of the GST Act indicates that a component of an overall enterprise can itself be an enterprise for the purposes of the going concern exemption.

Subsection 38-325(1) of the GST Act states:

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; and

(c) the supplier and the recipient have agreed in writing that the supply is of

a going concern.

Paragraphs 31 and 32 of Goods and Services Tax Ruling GSTR 2002/5 set out the view that a part of a business can itself be an enterprise for the purposes of the going concern exemption. They state:

Example 3: an enterprise within a larger enterprise

31. Stay-Puff Bakeries is a chain of retail bakeries conducted by Pufferies Pty Ltd ('Pufferies'). Pufferies sells the bakery operating in a particular suburb to Pies and Things partnership. As the suburban bakery is part of the larger enterprise being conducted by Pufferies and is operating as an independent enterprise, the aggregate of all of the things necessary to operate the suburban bakery, supplied under the arrangement, will be a 'supply of a going concern' .

32. A supply of all the things necessary for the continued operation of an activity which is part of an enterprise cannot be a 'supply of a going concern' unless the conduct of the activity is itself an 'enterprise' as defined in section 9-20.

Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 sets out the two elements that are essential for the continued operation of an enterprise. It states:

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.

Paragraphs 90 to 92 of GSTR 2002/5 discuss premises. They state:

90. Where particular premises are necessary for the continued operation of an enterprise, these premises must be supplied. Characteristics or attributes of particular premises may be determinative of the necessity for those particular premises to be supplied. For example, a factory building may have specially modified floors to take the weight of certain necessary machinery. The characteristics of the building itself are such that those particular premises are necessary for the continued operation of the enterprise.

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.

Paragraph 58 of GSTR 2002/5 discusses enterprises that operate from leased premises. It states:

58. Many enterprises operate from leased premises. The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

In accordance with paragraph 117 of GSTR 2002/5, the benefit of a franchise agreement (if applicable) is a thing which is necessary for the continued operation of an enterprise.

Paragraph 122 of GSTR 2002/5 discusses whether employees must be supplied. It states:

122. The services of employees are necessary for the operation of many enterprises. Employees are not 'things' as defined in section 195-1 and therefore are not of themselves 'things that are necessary for the continued operation of an enterprise'. As a matter of law, employment contracts are personal contracts and are incapable of assignment. The supply of the services of existing employees of an enterprise is not a thing necessary for the continued operation of the enterprise.

The situation in your case is similar to the scenario in paragraph 31 of GSTR 2002/5. The vendor in your case carries on a business operation in the territory that is to be supplied to you. The activity the vendor carries on in that territory is an enterprise in its own right and forms part of a larger enterprise being conducted by the vendor as it operates in other territories as well. In accordance with paragraph 38-325(2)(b) of the GST Act and paragraph 31 of GSTR 2002/5, the vendor in your case does not have to supply all of its territories and all of its assets etc. used in those territories in order to be making a supply of a going concern to you.

The things necessary for the continued operation of the vendor's business activity in the relevant territory are as follows:

• the lease on the premises in the relevant areas

• the plant and equipment used in the relevant territory

• the right to operate in the relevant territory

• the franchisee rights under the franchise agreement

• the right to use the (trading name) trading name

• a phone number of the vendor

The vendor will supply all of these things to you. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met.

The vendor will carry on its business activity in the relevant territory up to the time of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is met.

As both requirements of subsection 38-325(2) of the GST Act are met, the vendor will supply a going concern to you.

There is consideration for the sale of the going concern. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is met.

The purchaser is registered for GST. Therefore, the requirement of paragraph 38-325(1)(b) of the GST Act is met.

If the vendor and purchaser agree in writing that the sale of the business activity is the supply of a going concern, the requirement of paragraph 38-325(1)(c) of the GST Act would be met. Such an agreement is bilateral; the purchaser cannot compel the vendor to enter into such an agreement.

As all of the requirements of subsection 38-325(1) of the GST Act would be met if the parties agreed in writing that the sale of the business activity is the supply of a going concern, the sale of the business activity would be a GST-free supply of a going concern if the parties agree in writing that the sale of the business activity is the supply of a going concern. The sale of the plant and equipment would form part of the GST-free supply of the going under such circumstances.

Therefore, the sale of the business activity, including the plant and equipment, would not be a taxable supply if the parties agreed in writing that the sale of the business activity is a supply of a going concern. Hence, you would not meet the requirement of paragraph 11-5(b) of the GST Act in respect of your purchase of the business activity (including the plant and equipment) under such circumstances.

As you would not meet all of the requirements of 11-5 of the GST Act under such circumstances, you would not be entitled to an input tax credit on your purchase of the business activity or the plant and equipment specifically under such circumstances.

However, if the parties do not agree in writing that the sale of the business activity is a supply of a going concern, you would be entitled to an input tax credit on your purchase of the assets of the vendor's business activity carried in the relevant territory because the requirements of section 11-5 of the GST Act would be met. Based on the current circumstances, you are entitled to an input tax credit.

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