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Ruling

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

Question:

Is the purchase of a retail store (at a shopping centre in Australia) by an Australian company (you) from an Australian entity (vendor) subject to goods and services tax (GST), for the purposes of determining your input tax credit entitlement under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer:

No, the supply of the retail store (business) is a GST-free supply of a going concern to you, and therefore you are not entitled to claim an input tax credit in relation to the acquisition of this business.

Relevant facts and circumstances

The purchaser is an Australian company (you), which is registered for goods and services tax (GST).

You acquired a retail store (business) being carried on at a shopping centre in Australia.

The vendor is an Australian entity (vendor), who is registered for GST.

The purchase price is $XXX (exclusive of GST). The parties have agreed that the sale of the business is a GST-free supply of a going concern in accordance with the contract for the sale of business (contract).

You advise that the contract for the purchase of the business is subject to the assignment of the current lease (to the premises) and a licence from the vendor to you, in addition an authority's approval of your purchase.

You advise that in accordance with the contract, the vendor will supply assets essential to the operation of the retail store. The vendor sells and the purchaser (you) buys the business for the price, where the term 'business' is defined to mean the business and goodwill of a licensed retail store conducted by the vendor at the premises and includes the licence, stock and the plant (as defined in the contract).

The vendor will provide to you various documents (such as inventory of equipment; licence affecting the business; equipment and service agreement; current lease of premises; lessor's disclosure statement; business name registration certificate; and schedule of employees).

The vendor agrees to remain in possession of the business and to operate it as a going concern until the completion date (day of supply).

A copy of the contract and existing lease agreement(s) between the lessor (another third party) and lessee (the vendor) is provided.

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, Section 38-325

Reasons for decision

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to claim input tax credits (ITC) on any creditable acquisitions you make.

Section 11-5 of the GST Act provides that 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 for GST.

You acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or is of a private or domestic nature.

The facts indicate that you have satisfied paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act because you have acquired the business for a creditable purpose, you will or have provided consideration, and you are registered for GST.

What remains to be determined is whether the sale of the business to you is a taxable supply (as per paragraph 11-5(b) of the GST Act).

Is there a taxable supply to you?

GST is payable on a taxable supply under section 9-5 of the GST Act. The supplier satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

(a) the supplier makes the supply for consideration;

(b) the sale is made in the course or furtherance of their enterprise;

(c) the sale is connected with Australia as the business is carried on in Australia; and

(d) the supplier is registered for GST.

However, the supplies are not taxable to the extent that they are GST-free or input taxed.

There are no provisions under the GST legislation in which the sale of the business could have been input taxed. The GST-free provisions are taken into consideration.

GST-free

A supply of a going concern is GST-free under section 38-325 of the GST Act. Subsection 38-325(1) of the GST Act states:

(1) The *supply of a going concern is GST-free if:

1. the supply is for *consideration; and

2. the *recipient is *registered or *required to be registered; and

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

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

The requirements in subsection 38-325(1) of the GST Act are satisfied as the supplies are made to you for consideration; you (as the recipient) are registered for GST; and you and the supplier have agreed in writing that the sale is of a going concern (as agreed in your contract of sale).

In addition to these requirements, a supply must be a 'supply of a going concern' as defined under subsection 38-325(2) of the GST Act.

Determining whether there is a supply of a going concern

Subsection 38-325(2) of the GST Act provides the definition of a 'going concern':

(2) A supply of a going concern is a supply 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 until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

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 when the supply of a going concern is GST-free.

The supply of the business is made under an arrangement(s) which is outlined in the contract of sale prior to the day of supply, and therefore the precondition of subsection 38-325(2) of the GST Act is satisfied.

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

The term 'enterprise' is defined in section 9-20 of the GST Act, and includes (amongst others) 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.

The facts indicate that the identified enterprise for the purposes of subsection 38-325(2) of the GST Act being carried on by the supplier is a retail store (business).

Paragraph 38-325(2)(a) - All the things necessary for the continued operations of the enterprise

What needs to be determined is whether the supplier has supplied to you all the things necessary for the continued operations of the retail store (business).

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. 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. The term 'all things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. 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.

Further, paragraphs 74, 75, and 91 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 economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

In relation to premises that are necessary, and statutory licences and authorisations, paragraph 91 and 105 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…

105. Where a supplier is permitted by the relevant statutory regime to transfer the licence, permit or other statutory authorisation, it must transfer it. Where the supplier may only transfer the thing with permission from a relevant entity, it may attempt to gain that permission…

From the facts provided, the vendor will sell to you the retail store (business), which includes the goodwill, licence, stock, and plant. The vendor will attempt to assign the lease to the current premises and transfer the licence to you. The vendor will supply to you all of the things that are necessary for the continued operation of this retail store (business), as the vendor supplied you with the assets, operating structure and process essential for the continued operation of this retail store (business).

Paragraph 38-325(2)(b) - supplier carries on, or will carry on, the enterprise until the day of the supply

Paragraph 141 of GSTR 2002/5 states:

141. A supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is 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.

A supply will not be a supply of a going concern where, on the day of the supply, the activity carried on by the enterprise has ceased.

The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise (paragraph 161 of GSTR 2002/5).

From the facts provided, the vendor will continue the retail store (business) until the day of supply. Accordingly, and the requirement of paragraph 38-325(b) of the GST Act is satisfied.

All the requirements of section 38-325 of the GST Act are satisfied, and therefore the supply of the retail store (business) is a GST-free supply of a going concern.

Conclusion

The supply of the retail store (business) to you is not a taxable supply because it will be a GST-free supply of a going concern, and no GST is payable. The requirement of paragraph 11-5(b) of the GST Act is not satisfied and you are not entitled to claim an ITC in relation to this acquisition.