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Ruling

Subject: GST and the Going Concern provisions

Question 1

Will the acquisition of a business by the purchaser from the vendor be an acquisition of a going concern for the purposes of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, where all the conditions set out below are met, the acquisition of the enterprise will be a GST-free acquisition of a going concern for the purposes of section 38-325 of the GST Act.

Relevant facts and circumstances

You are the reporting entity for a group registered to report Goods and Services Tax

You propose to purchase an enterprise by entering into an Agreement for Sale (Agreement)

The enterprise is currently trading

You advised the Vendor is registered with an Australian Business Number and is currently registered for Goods and Services Tax.

The Vendors registration is listed on the Australian Business Registration which states the Vendor is currently registered for GST.

A draft copy of the Agreement was provided with the application for a private ruling.

The enterprise is in Australia.

The sale is for consideration.

The Agreement is subject to the assignment of the current leases and licences and necessary approvals. The Agreement is conditional on the provisional transfer of necessary licences leases and approvals.

The Agreement includes a Going concern clause

The Agreement provides for the supply of assets essential to the operation of the enterprise.

The requirement for all things necessary for the continued operation of an enterprise is outlined in the Agreement.
The Agreement includes a clause to allow the Vendor to continue the enterprise until the date of settlement.

Relevant legislative provisions

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999

Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply if:

· it makes a supply for consideration; and

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

· 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.

Where the Vendor is not registered for GST, the sale of the property will not be a taxable supply as the requirements of section 9-5 are not met. An entity that is not registered for GST cannot charge GST on the supply it makes.

You provided the Australian Business Number for the recipient and confirmed they are registered for the Goods and Services Tax (GST), therefore the supply of the business could satisfy the positive limbs of section 9-5 of the GST Act. Hence, it raises the issue of whether the supply of the business would also meets the conditions to be a GST-free supply of a going concern.

GST-free supply

The supply will be a GST-free supply of a going concern where the requirements of section 38-325 of the GST Act are met.

Goods and Services Tax ruling GSTR 2002/5: Goods and Services Tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses a 'supply of a going concern' for the purposes of section 38-325 of the GST Act and when the 'supply of a going concern' is GST-free.

For a supply to be a GST-free supply of a going concern under section 38-325 of the GST Act:

· the supply must be made under an arrangement under which:

· the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

· the supplier carries on, or will carry on, the enterprise (whether or not as part of a larger enterprise) until the day of the supply;

· the supply must be for consideration;

· the recipient of the supply must be registered or required to be registered for GST; and

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

Supply under an arrangement

The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The supplier and the recipient may identify the arrangement and the supplies under the arrangement in the written agreement which is required under paragraph 38-325(1)(c) of the GST Act or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply. However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all of the transactions entered into and the circumstances in which the transactions are made (refer to paragraphs 19 and 20 of GSTR 2002/5).

A sale agreement that provides for the acquisition of all the assets necessary to continuing to operate the enterprise including the continued operation of the enterprise will constitute an arrangement that satisfies the requirements of subsection 38-325(2) of the GST Act.

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

Paragraphs 38-325(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity or series of activities done in the form of a business, or in the form of an adventure or concern in the nature of trade, or on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property.

In this case, the Agreement explains completion is conditional on the grant of the application being the provisional transfer of a licence to you and in addition the Vendor assigning its interest in the Premises Lease to you.

Where the sale of a property is subject to the existing tenancy and completion is conditional upon assignment of the existing lease and licenses to the purchaser, it will be our view that all the things necessary for the continued operation of the enterprise are being supplied under the arrangement.

Supplier carries on the enterprise until the day of the supply

Under paragraph 38-325(2)(b), a supply under an arrangement will only be the supply of a going concern where the enterprise is carried on, or will be carried on, by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership (refer to paragraph 141 of GSTR 2002/5). The day of supply is determined in each case by reference to the terms of the particular contract, if applicable, and the nature of the supply. It is the date on which the recipient assumes effective control and possession of the enterprise carried on by the supplier. Refer to paragraph 161 of (GSTR 2002/5)

Where the enterprise carried on by the Vendor includes all necessary licences and leases and the vendor will continue to carry on this enterprise until the completion date, it will be our view that the vendor will be carrying on the enterprise until the completion date when the acquisition will be made by the purchaser.

Supply for consideration

Paragraph 38-325(1)(a) of the GST Act requires that the supply is made for consideration.

Recipient registered for GST

Paragraph 38-325(1)(b) of the GST Act requires that the recipient is registered or required to be registered for GST.

Agreed in writing

Under paragraph 38-325(1)(c) of the GST Act, the supplier and the recipient must have agreed in writing that the supply is of a going concern.

The term 'agreed in writing' means that the supplier and the recipient have made a mutual declaration in such form that clearly evidences that they agree that the supply is a 'supply of a going concern' (refer paragraph 181 of GSTR 2002/5).

Where the sale and purchase agreement stipulates that the Vendor and the Purchaser agree that the supply of the leasing enterprise is a supply of a going concern, we consider that the Vendor and Purchaser have agreed in writing that the acquisition of the enterprise is the acquisition of a going concern.

Where all the above requirements are met and where the sale of all the necessary assets for the continued operation of the enterprises, the acquisition of the property by the purchaser from the vendor will be a GST-free acquisition of a going concern for the purposes of section 38-325 of the GST Act.