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Ruling

Subject: GST and acquisition of a going concern

Question

Are you entitled to an input tax credit on the acquisitions of the commercial units?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You acquired a number of commercial units (the commercial units) from the vendor.

The contracts were exchanged on a specified date.

You supplied a copy of the contract for the sale of the commercial units (the contract). The contract marks the sale as not being a taxable supply. The contract marks the sale as being a GST-free supply of a going concern. The contract also provides that the sale is 'subject to existing tenancies'.

The contract provides that if the contract says that the sale is the supply of a going concern then:

· the parties agree that the supply of the property is a supply of a going concern

· the vendor must, between the contract date and completion, carry on the enterprise conducted on the land in a proper and business-like way, and

· if the purchaser is not registered by the completion date, the parties must complete and the purchaser must pay on completion, in addition to the price, an amount equal to 10% of the price.

You supplied copies of the lease agreements for the commercial units. The terms of all the leases commenced on a specified date and ended prior to the date of exchange of the contracts.

All the leases contained an option for renewal for a further specified term provided the tenants gave a notice in writing within the specified time that they wished to take the further term offered.

The commercial units were supplied to you on the date of completion. You advised that all the leases were renewed and the commercial units were not sold with vacant possession.

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 11-20.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(2).

Reasons for decision

Summary

You are not entitled to claim an input tax credit in respect of the purchase of the commercial units as the supply of the commercial units to you under the circumstances described was a GST-free supply of a going concern pursuant to section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Input tax credit

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

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.

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

For an acquisition to be a creditable acquisition all the requirements of section 11-5 of the GST Act must be met.

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply.

Taxable supply

Whether or not a supply is a taxable supply depends on the supplier's circumstances. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

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.

In your case, based on the information provided, the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act are met. This is because the vendor sold the commercial units for consideration, the supply was made in the course or furtherance of an enterprise that the vendor carried on, the sale was connected with Australia and the vendor was registered for GST at the time of sale.

The supply of the commercial units to you was not an input taxed supply under any provision of the GST Act or under a provision of another Act. Therefore, what is left to consider is whether the sale was GST-free.

GST-free supply

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.

Section 38-325 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.

Section 38-325 of the GST Act states:

(1) The *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.

(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 larger enterprise carried on by the supplier).

In order to determine whether the sale of the commercial units was a GST-free supply of a going concern, firstly it needs to be determined whether the sale was a supply of a going concern as defined in subsection 38-325(2) of the GST Act.

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act set out the requirements which need to be satisfied in relation to an identified enterprise.

Section 9-20 of the GST Act provides that an enterprise includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or the grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

In your case, based on the information provided, the vendor was carrying on a leasing enterprise from the commercial units. This is the enterprise identified for the purposes of subsection

38-325(2) of the GST Act. Therefore, the vendor was required to supply to you all of the things that were necessary for the continued operation of that enterprise (paragraph 38-325(2)(a) of the GST Act). The vendor was also required to carry on the enterprise until the day of the supply (paragraph 38-325(2)(b) of the GST Act).

Goods and Services Tax Ruling GSTR 2002/5 discusses a supply of a going concern for the purposes of section 38-325 of the GST Act and explains when the supply of a going concern is GST-free.

Paragraph 72 of GSTR 2002/5 provides that what is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise.

Paragraph 73 of GSTR 2002/5 provides that a thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

GSTR 2002/5 provides that, generally, all of the things that are necessary for the continued operation of a leasing enterprise include the supply of the property and the benefit of the covenants under a lease.

In your case, the commercial units were not sold with vacant possession and the sale was subject to the leases granted to the tenants. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is met as on the day of the supply, the vendor supplied to you all of the things that were necessary for the continued operation of the leasing enterprise.

Furthermore, the requirement of paragraph 38-325(2)(b) of the GST Act is also met as the vendor carried on the leasing enterprise until the settlement date.

The supply of the commercial units with the leases intact therefore is a supply of a going concern as it satisfies all the requirements of subsection 38-325(2) of the GST Act.

The supply also meets the requirements of subsection 38-325(1) of the GST Act as:

· the supply was for consideration

· you were registered for GST at the time of the supply, and

· according to the contract, you and the vendor had agreed in writing that the supply was of a going concern.

Accordingly, the supply of the commercial units with the leases intact is a GST-free supply of a going concern as it meets all the requirements of section 38-325 of the GST Act.

As the supply of the commercial units with the leases intact is not a taxable supply, the requirement of paragraph 11-5(b) of the GST Act is not met. Consequently, you have not made a creditable acquisition under section 11-5 of the GST Act and therefore are not entitled to an input tax credit under section 11-20 of the GST Act.