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Edited version of your written advice
Authorisation Number: 1051332533537
Date of advice: 6 February 2018
Subject: GST and the sale of a business for an unregistered entity
Question
Is the sale of your business, which includes the business premises, a sale of a GST-free going concern?
Answer
No. The sale of your business and business premises is not a sale of a GST-free going concern as you are not registered or required to be registered for GST.
Relevant facts and circumstances
You are not registered for GST.
You bought a vacant shop (premises) in 2005 and set up an internet café business (business).
You commenced operating the business from the 2006-07 year.
You operated the business as a sole trader and your annual turnover is less than $75,000.
You are planning to sell the premises and the business.
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 23-5
A New Tax System (Goods and Services Tax) Act 1999 Section 23-15
A New Tax System (Goods and Services Tax) Act 1999 Section 188-10
A New Tax System (Goods and Services Tax) Act 1999 Section 188-25
Reasons for decision
You make a taxable supply under section 9-5 of the GST Act when:
(a) the supply is made for consideration; and
(b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and
(c) the supply is connected with the indirect tax zone (Australia); and
(d) the entity is registered, or required to be registered.
However, a supply is not a taxable supply if it is GST-free or input taxed.
You satisfy sub-sections 9-5(a), (b) and (c) as the supply of your business and premises is for consideration, it is made in the course of the enterprise you conduct and the supply is connected with the indirect tax zone.
You are not registered for GST, therefore it needs to be established that as a result of the sale of the business and the premises, whether you will be required to be registered for GST.
Section 23-5 of the GST Act provides that you are required to be registered for GST if:
● you are carrying on an enterprise; and
● your GST turnover meets the registration turnover threshold.
You are carrying on an enterprise of running an internet café. You are required to be registered for GST, if your annual turnover from your enterprise meets the registration turnover threshold.
Under subsection 23-15(1) of the GST Act, unless you are a non-profit body, your registration turnover threshold is $75,000.
Subsection 188-10(1) of the GST Act provides that your annual turnover meets a particular turnover threshold if:
● your current annual turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected annual turnover is below the turnover threshold; or
● your projected annual turnover is at or above the turnover threshold.
Section 188-10(2) of the GST Act provides that your annual turnover does not exceed a particular threshold if:
● your current GST turnover is at or below the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold; or
● your projected GST turnover is at or below the turnover threshold.
In this circumstance your current turnover is below the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold. This is due to the operation of section 188-25 of the GST Act that disregards as part of the projected GST turnover the supply of a capital asset solely as a consequence of ceasing to carry on an enterprise.
GSTR 2001/7 discusses the meaning of ‘capital asset’ at paragraphs 31 to 36.
Meaning of 'capital assets'
31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.
32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.
33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).
34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.
35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.
36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.
Where at the time of the proposed sale of the premises and business, the character of the premises remains essentially the same as it was when used in the enterprise, that is, it is a commercial property and business asset being used to run an internet cafe, its disposal will be the mere realisation of a capital asset by you. The sale proceeds will not be taken into account in determining your projected GST turnover. Therefore you are not required to be registered for GST.
As such, the sale of the business and premises is not a taxable supply and not a sale of GST-free going concern.
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