Edited version of private ruling

Authorisation Number: 1011665539734

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Ruling

Subject: supply of a going concern

Question

Are the recipients (you) entitled to an input tax credit in relation to the purchase of a motel business pursuant to two interdependent contracts, the first contract is for the commercial premises (comprising of land, motel and equipment) and the second contract is for the business?

Answer

No, you are not entitled to an input tax credit in relation to the purchase of a motel business pursuant to two interdependent contracts because the supply of the motel business is a GST-free supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You (the recipients) are registered for goods and services tax (GST) purposes in Australia. You entered into two contracts, the first contract is for the purchase of a commercial property (the commercial premises), and the second contract is for the purchase of a motel business (the business) which was carried on the property. The whole of the building on the commercial premises is used to run the motel business.

The suppliers for the commercial premises and the business, (the suppliers), are also registered for GST.

The first contract for the supply of the commercial premises includes fixtures, for example, stoves and hot water systems. For chattels included in the supply, you provide a list of inventory of the motel, for example, beds, mini fridges, kitchen equipments, washing machines, and so on. The price for the first contract is $XXX.

The second contract states that this contract is subject to and conditional upon the first contract. The second contract was entered into contemporaneously with the first contract. The second contract states that no Service Contracts are in place for the business. The price for the second contract is $YYY.

You state that at the date of the supply, the suppliers operated a motel business from the commercial premises. All future bookings were transferred to the recipients. You provide a copy of the business weekly summary and check in forms from clients near the date of the supply.

The suppliers and recipients agreed in both contracts that the supply of the commercial premises and the business is a supply of a going concern.

You state that no motel or accommodation licence is required to run a motel in your state unless it involves activities which require licences, for example, food business, alcohol licenses, gaming licence, and so on. However the business does not provide these services.

Two licence application forms were duly executed by the suppliers on the date of the supply to enable the transfer of two advertising device licences in relation to the motel business to you.

You also provide a copy of your letter to the Office of Fair Trading together with your application to change the proprietorship of the business name from the suppliers to the recipients effective from the date of the supply.

You contend that the suppliers' supply to you, comprising of the commercial premises and the business, is a GST-free supply of a going concern.

You contend that the suppliers' supply to you provides you with the property and all the things necessary for the continued operation of the business of running the motel business on the commercial premises, for example, plant and equipment, business name and licence agreements.

Reasons for decision

Creditable acquisition

Section 11-20 of the GST Act provides that you are entitled to GST credits for the GST included in the price of your creditable acquisitions. An acquisition is any form of acquisition whatsoever (section 11-10 of the GST Act). 

Section 11-5 of the GST Act 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, or *required to be registered.

Note: The terms marked with an asterisk are defined in the GST Act.

Section 11-15 of the GST Act provides the meaning of creditable purpose. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (subsection 11-15(1) of the GST Act). However, you do not acquire a thing for a creditable purpose to the extent that the acquisition is of a private or domestic nature (paragraph 11-15(2)(b) of the GST Act). An acquisition is also not for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed (paragraph 11-15(2)(a) of the GST Act). The exceptions contained in subsections 11-15(3), (4) and (5) of the GST Act do not apply to your situation.

Guidance on when an acquisition is made for a creditable purpose is provided in Goods and Services Tax Ruling GSTR 2008/1 'Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose?'

Based on the facts, the acquisitions you make when you purchase the motel business pursuant to two interdependent contracts (the first contract is of the commercial premises, and the second is of the business), are acquired in carrying on your enterprise of providing commercial accommodation in commercial residential premises. Section 87-15 of the GST Act defines commercial accommodation as follows:

Commercial accommodation means the right to occupy the whole or any part of *commercial residential premises, including, if it is provided as part of the right so to occupy, the supply of:


(a) cleaning and maintenance; or


(b) electricity, gas, air-conditioning or heating; or


(c) telephone, television, radio or any other similar thing.

The meaning of commercial residential premises given in section 195-1 of the GST Act includes a motel.

There is no private or domestic use of your acquisitions. Your supply of commercial accommodation in commercial residential premises is not an input taxed supply. Your acquisitions are used solely for the making of supplies that would not be input taxed.

Therefore you satisfy section 11-15 of the GST Act, and your acquisition is for a creditable purpose. Hence, you satisfy paragraph (a) of section 11-5 of the GST Act.

You also satisfy paragraph (c) and (d) of section 11-5 of the GST Act because you paid consideration to the suppliers for your acquisitions and you are registered for GST. The next step is to consider paragraph (b) of section 11-5 of the GST Act. This paragraph requires that the supply of the thing to the recipient (you) is a taxable supply.

Taxable supply

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied. 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

From the information received, the supply of the motel business pursuant to two interdependent contracts made by the suppliers to you satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) the suppliers receive consideration from you when they make the supply to you;

b) the supplies are made in the course of an enterprises that the suppliers carry on;

c) the supplies are connected with Australia as the supplies are made through an enterprise that the suppliers carry on in Australia; and

d) the suppliers are registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

There is no provision in the GST Act that will make the supply of motel business or a commercial premises input taxed. The next step is to determine whether the supply will be GST-free.

GST-free supply of a going concern

A supply of a going concern is GST-free where all of the requirements of subsections 38-325(1) and 38-325(2) of the GST Act are met.

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

a) the supply is for consideration

b) the recipient is registered or required to be registered for GST, and

c) the supplier and the recipient have agreed in writing that the supply is of a going concern. 

Subsection 38-325(2) of the GST Act provides that a 'supply of a going concern' is a supply under an arrangement where:  

(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).

From the facts, paragraphs (a), (b) and (c) of subsection 38-325(1) of the GST Act are satisfied because you pay consideration to the suppliers, you are registered for GST, and you and the supplier have agreed in the two interdependent contracts that the supply is of a going concern. Therefore if the supply meets the requirements of a supply of a going concern under subsection 38-325(2) of the GST Act, the supply will be GST-free.

The term 'supply under an arrangement' in subsection 38-325(2) of the GST Act includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise which is referred to in paragraphs 38-325 (2)(a) and (b) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 provides guidance on what is a 'supply of a going concern' and when a 'supply of a going concern' is GST-free.

Paragraphs 18A to 18F of GSTR 2002/5 state as follows:

18A. The meaning of the term 'going concern' for the purposes of subdivision 38-J was considered in the Administrative Appeals Tribunal (the Tribunal) decision of Debonne Holdings Pty Ltd v Commissioner of Taxation (Debonne).

18B. Debonne involved the sale of a hotel business pursuant to two interdependent contracts. One contract was a 'business contract' for the sale of the business assets and the other was a 'land contract' for the sale of the land on which the hotel stood. The 'business contract' expressly stated that the sale of the business was the sale of a 'going concern'. The contract for the sale of the land was silent on the question of 'going concern' and provided that the purchase price included any GST liability for which the vendor might be liable.

18C. In Debonne, the Tribunal found that the parties had agreed, pursuant to subsection 38-325(1), that the whole subject of the sale, which comprised both the land and business, was the sale of a 'going concern', and concluded that the totality of that sale was a GST-free supply of a going concern. The Tribunal reached this conclusion, notwithstanding that the business and the land were conveyed pursuant to separate contracts and the 'land contract' was silent on the issue of 'going concern'.

18D. In reaching the decision, referred to in paragraph 18C of this Ruling, the Tribunal relied on the fact that the 'business contract' expressly used the term 'going concern' with the meaning it has for the purposes of the GST Act. Although the term 'going concern' is not defined in the GST Act, the Tribunal considered that the relevant 'going concern' for the purposes of the GST Act was the whole subject matter of the sale, being the business together with the land. The Tribunal also stated that had the parties' agreement been limited to the extent of the 'business contract' it would have been ineffective for the purposes of section 38-325 because the 'business contract' alone did not amount to, or give rise to, a supply of a going concern.

18E. Paragraph 5.108 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (the Explanatory Memorandum) refers to the supply of enterprises as 'going concerns' being GST-free under subdivision 38-J. This reference to a supply of 'enterprises' as 'going concerns' is consistent with the Tribunal's finding in Debonne that it was the total subject matter of the sale, comprising the separate contracts for the sale of the land and the business, that was the relevant 'going concern' for the purposes of the GST Act.

18F. On the basis of the Tribunal's decision in Debonne and the Explanatory Memorandum referred to in paragraph 18E of this Ruling, we consider that the phrase 'supply of a going concern' in subsection 38-325(2) is a reference to the sum of all of the things necessary for the continued operation of an enterprise.

According to the facts, the suppliers' supply is the sale of a motel business pursuant to two interdependent contracts, the first contract is of the property and the second is of the business. The suppliers and recipients had agreed that the whole subject of the sale, which comprised both the property and the business, was the sale of a 'going concern' as evidenced in the two contracts.

Since the phrase 'supply of a going concern' in subsection 38-325(2) of the GST Act is a reference to the sum of all of the things necessary for the continued operation of an enterprise, the whole subject matter of the sale, being the business together with the property, gives rise to a supply of a going concern so long as all conditions in subsection 38-325(2) of the GST Act are satisfied.

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.

Identified enterprise

One of the key requirements that must be satisfied as outlined above is that an enterprise is being carried on. The vendor was carrying on a motel business which is operated on the commercial property which they owned.

The term enterprise is defined in section 9-20 of the GST Act to include, amongst other things, an activity, or series of activities done in the form of a business

An enterprise is an activity, or series of activities, done:


(a) in the form of a *business; or


(b) in the form of an adventure or concern in the nature of trade; or


(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or …

According to the facts, the suppliers carried on a motel business. The suppliers' activity of providing commercial accommodation in commercial residential premises meets the definition of an enterprise under paragraph 9-20(1)(a) or (c) of the GST Act. This enterprise is the enterprise identified for the purposes of subsection 38-325(2) of the GST Act.

Supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise

Paragraph 47 of GSTR 2002/5 explains that the things which are necessary for the continued operation of an enterprise identified for the purposes of section 38-325 vary according to the nature of the enterprise and the thing supplied.

The meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise' is explained in paragraphs 72 to 83 of GSTR 2002/5. Relevantly, paragraphs 74 and 75 of GSTR 2002/5 state:

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 economics activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

For the continued operation of an enterprise of providing commercial accommodation in commercial residential premises, it is necessary for the suppliers to supply the premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, and licences to the recipients so that the recipients can carry out the motel enterprise without any disruption.

Paragraph 80 of GSTR 2002/5 provides that a supplier will only be treated as having supplied all of the things necessary for the purposes of section 38-325 if the recipient is put in a position on the day of the supply where it can, if it chooses, continue to operate the identified enterprise.

In this case, the suppliers duly executed two licence application forms on the date of the supply to enable the transfer of two advertising device licences in relation to the motel business to you.

The suppliers also signed the application to change the proprietorship of the business name from themselves to you, effective from the date of the supply.

Therefore, the suppliers supply the land, the building, the plant and equipment, the bookings, the licences and all the things necessary to the recipients (you) for the continued operation of the motel business.

The suppliers carry on the leasing enterprise until the day of the supply

Provided that in the period prior to settlement, the suppliers continued to operate the motel business, the suppliers' enterprise of providing residential accommodation in commercial premises would be active and operating on the day of the supply, which is the day of settlement of the contracts.

The contracts ensure that the suppliers' motel business is capable of continuing after the transfer of ownership of the property to the recipients (paragraph 141 of GSTR 2002/5). You provide evidence of booking in the form of the business weekly summary and check in forms dated from a period near the date of the supply. It follows that the suppliers carried on the enterprise until the day of the supply and you satisfy subsection 38-325(2)(b) of the GST Act.

Therefore, the requirements of paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act are satisfied. Hence the supply of the suppliers' motel business together with the commercial premises, where the business was carried on, is the supply of a going concern for GST purposes.

Since both subsections 38-325(1) and (2) of the GST Act are satisfied, the supply is a supply of a going concern and is GST-free. The supply is not a taxable supply.

Since the supply of the motel business together with the commercial premises is not a taxable supply to you, you do not satisfy paragraph (b) of section 11-5 of the GST Act, and you are not entitled to input tax credits for your acquisition of the motel business together with the commercial premises.