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Ruling

Subject: GST and supply of a GST-free going concern

Question 1

Will you) be entitled to an input tax credit on the acquisition of the business?

Answer

No

Relevant facts and circumstances

You are not currently registered for goods and services tax (GST) but you will be registered at the time of the acquisition.

You have entered into a Heads of Agreement to acquire the business (Business).

The vendor is supplying the Business which includes providing a number of services:

The vendor will sell the whole Business including the assets, trade marks, logos, domain names, systems of operating, training materials and all such intellectual property.

Your Heads of agreement details the assets to be included in the supply and includes the following:

· The name of the supplier;

· The 1300 number used by the supplier;

· The website and several domain names registered to the supplier;

· All of the intellectual property of the supplier including logos and trademarks;

· All current clients and contracts;

· Past client records;

· All teaching and training materials.

All work in progress will be transferred to you at settlement to be completed by you. The fees will be adjusted at settlement between work done to settlement date by supplier and work to be completed by you.

The vendor shall provide tuition prior to the sale and after the sale of the Business, as well as training.

The key person will continue an association with you in the Business in the role of consultant by mutual agreement between the parties.

The supplier holds a lease to a room with a related entity, where the Business is operated from, as well as a 1300 number and a website.

The Business involves the provision of services which are carried out at the client's premises or other locations by mutual agreement with the client and not at the leased premises.

Client's contact the Business via the 1300 number or the website and do not walk off the street to the leased premises.

The leased premises will not be supplied to you as part of the supply of the Business.

You intend to operate the Business after acquisition from one of your own business premises.

You are of the view that the premises are not necessary for the supply to be a supply of a going concern.

You and the supplier acknowledge that a formal agreement will be executed and agreed to prior to the supply which will incorporate the following:

· The supplier and you as the recipient agree that the disposal of the Business under the Heads of Agreement constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.

· The supply is for consideration

· You warrant that you will be registered for GST at the time of completion of the supply.

· The supplier agrees to carry on the Business until the day of the supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

section 38-325.

section 11-5

section 7-1

section 9-5

section 9-30

Reasons for decision

Subsection 7-1(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entitlement to an input tax credit arises on a creditable acquisition.

Section 11-5 of the GST Act provides the requirements for an entity to make a creditable acquisition and 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 that the asterisks denote a defined term in the GST Act.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that it is acquired in carrying on your enterprise.

Section 9-20 of the GST Act includes as an enterprise an activity, or a series of activities, done in the form of a business.

In your case, you intend to purchase the Business from the vendor; hence the acquisition will be in relation to the carrying on of your enterprise. 

Therefore, the acquisition of the Business under the arrangement will be for a creditable purpose and the first requirement of section 11-5 of the GST Act will be met.

Based on the facts provided, you are providing consideration for the acquisition and you will be registered for GST at the time of the supply. Therefore the third and fourth requirements of section 11-5 of the GST Act are also satisfied.

The second requirement of section 11-5 of the GST Act is that the supply to you is a taxable supply. Therefore we need to consider whether the supply of the Business to you is a taxable supply, to determine if you have made a creditable acquisition.

Taxable supply

Under section 9-5 of the GST Act an entity makes a taxable supply if:

· it makes a supply for consideration,

· the supply is in the course or furtherance of an enterprise that it carries on,

· the supply is connected with Australia, and

· the entity is 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.

In your case the supply of the Business is for consideration, the supply is made in the course or furtherance of an enterprise that the vendor carries on, the supply is connected with Australia and you and the vendor will be registered or required to be registered at the time of the supply.

Therefore, the supply of the Business will meet all of the above criteria for it to be classified as a taxable supply.

There are no provisions in the GST Act or any other Act that allow the Business to be input taxed, however, there are provisions in the GST Act that may allow the supply to be GST-free. In particular, the supply may be a GST-free supply of a going concern.

GST-free supply

Subsection 9-30(1) of the GST Act states:

(1) A supply is GST-free if:

(a) it is GST-free under Division 38 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

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.

A supply of the Business can be a supply of a going concern if the arrangement under which the supply is made, satisfies all the requirements of subsection 38-325(2) of the GST Act. This being the case, a supply of the Business under an arrangement can be a GST-free supply of a going concern where the supply satisfies all the requirements of subsection 38-325(1) of the GST Act.

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

(a) you make the supply for consideration,

(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.

Based on the information provided, the supply of the Business to you is:

· for consideration,

· between registered parties, and

· the supplier and you as the recipient agree that the disposal of the Business under the Heads of Agreement constitutes the supply of a going concern in accordance with Subdivision 38-J of the GST Act.

Accordingly, the requirements of subsection 38-325(1) are satisfied to the extent that the supply is for consideration, you and the supplier are registered for GST and you have agreed in writing that the supply is of a going concern.

A supply of a going concern

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of subdivision 38J of the GST Act.

Subsection 38-325(2) states:

(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 large enterprise carried on by the supplier)

For a supply to be considered as a 'supply of a going concern' it must satisfy the elements of subsection 38-325(2) of the GST Act. Paragraph 29 of GSTR 2002/5 states that subsection 38-325(2) requires the identification of an enterprise that is being carried on by the supplier (the 'identified enterprise'). As discussed in the ruling, this is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

In your case, the identified enterprise is the Business. For this supply to be a supply of a going concern all of the things necessary for the continued operation of the enterprise must be supplied.

GSTR 2002/5 discusses the meaning of the phrase all of the things that are necessary for the continued operation of an enterprise at paragraphs 72 and 73 and states:

72.The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. The things that are 'necessary' will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all of the things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. Access to environmental factors, for example, access to public roads, public telephone systems and postal services, are not ordinarily things which must be supplied by the supplier.

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

The vendor is supplying you with the 1300 number, all of the intellectual property, including logos and trademarks, all current clients and contracts, work in progress, past client records, all teaching and training materials. In addition you will be receiving tuition prior to the sale and after the sale of the Business, as well as training. Also, the key person will continue on with you in the Business in a contract role of consultant, by mutual agreement.

However, you will not be acquiring premises or the right to occupy premises from the vendor. It is now necessary to determine if premises are necessary for the continued operation of the Business.

The view of the Australian Tax Office (ATO) in relation to premises being necessary for the continued operation of an enterprise is contained in GSTR 2002/5. 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 business.

In your case, the vendor shares leased premises with another related entity and the vendor will not be supplying these premises to you. You propose to carry on the Business from your own premises. The services supplied by the Business are provided at the client's premises or elsewhere, not the leased premises and there is no client contact at the leased premises. Client's contact the Business via the 1300 number or the website and do not walk off the street to the leased premises.

In the circumstances, we consider that premises are not one of the things that are necessary for the continued operation of the Business.

As the vendor is supplying all the things necessary for the continued operation of the Business, the supply to you will be a supply of going concern under subsection 38-325(2) of the GST Act.

Based on the information you have provided, the supply by the vendor will be a GST-free supply of a going concern. Accordingly, the requirement of paragraph 11-5(b) of the GST Act will not be met and you will not be entitled to an input tax credit for your acquisition of the Business.