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Ruling

Subject: Supply of a going concern

Question

Can the Commissioner confirm that the acquisition of the business by Entity A (you) from the Seller under the Agreement:

· will 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), and

· is not a creditable acquisition under section 11-5 of the GST Act.

Answer

The Commissioner confirms that the acquisition of the business by you from the Seller under the Agreement:

· will be an acquisition of a going concern for the purpose of section 38-325 of the GST Act, and

· is not a creditable acquisition under section 11-5 of the GST Act.

Relevant facts

You are registered for the goods and services tax (GST) and carry on a business of manufacturing goods.

You entered into an Agreement with the Seller for the purchase of the Sellers manufacturing businesses.

Subsequent to you entering into the Agreement with the Seller administrators were appointed to the Seller by their board of directors.

The administrators carried on the enterprise of the Seller until the Completion Date.

You agreed to purchase the business which was being conducted by the Seller and under the Agreement you will purchase all the assets necessary for the continued operation of the Seller's enterprise.

Furthermore, the Seller took steps to transfer the benefits of the property lease which the Seller had with a lessor to you.

You will provide the Seller an amount as consideration for the supply of the business.

Just prior to the sale of the business the joint administrators permitted all employees to take annual leave pending the sale of the business to you.

As part of the Agreement the Seller has also provided you with a list of employees that work in the business and you have agreed to make an offer of employment to each of the employees on the express basis that the employee resigns from their employment with the Seller on or before the Completion Date.

The Seller is registered for GST.

You and the Seller have agreed in writing that the sale of the business under the Agreement will be made as a going concern.

You commenced operating the business activity immediately after the Completion Date.

Relevant legislative provisions

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

11-5 A New Tax System (Goods and Services Tax) Act 1999

11-20 A New Tax System (Goods and Services Tax) Act 1999

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

58-5 A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

1(a) Can the Commissioner confirm, that the acquisition of the business by you from the Seller under the Agreement will be an acquisition of a going concern for the purposes of section 38-325 of the GST Act.

Division 58 of the GST Act sets out how to ascribe activities of a representative of an incapacitated entity between the entity and the incapacitated entity for GST purposes. In particular, supplies, acquisitions and associated acts and omissions, by the representative are, in most cases, treated as having been by the incapacitated entity. This is to ensure that a transaction by the representative has the same consequences under the GST laws as if the incapacitated entity has no representative.

Pursuant to division 58 of the GST Act, a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered. A representative of an incapacitated entity can make a GST-free supply of a going concern if the requirements of section 38-325 of the GST Act are satisfied.

In this case at the time the parties to the Agreement sell and purchase the business entered into the Agreement the Seller was not under administration. However, by the Completion Date, an administrator was representing the Seller. Therefore, you acquired the business from the Seller when it was under administration. Thus, for GST purposes, the Seller is considered to be an incapacitated entity. As such the supply under the Agreement would be made by the administrators in their capacity as the representative of the incapacitate entity (i.e. the Seller). On this basis, in this ruling, a reference to the supply by the Seller is a reference to a supply made by the administrators in their capacity as the representative of the Seller.

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 this case the supply by the Seller is made for consideration, the Seller is registered for GST and you and the Seller have agreed in writing, under the terms of the Agreement, that the supply is a going concern. As such the requirements of subsection 38-352(1) are satisfied. Therefore what remains to be considered is if the requirements under subsection 38-325(2) 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. In particular paragraph 15 to 18 of this ruling state:

What is a 'supply of a going concern'?

The statutory term 'supply of a going concern' is defined in subsection 38-325(2). Pursuant to the statutory definition of supply in section 9-10, there may be more than one supply made under an arrangement. However, in accordance with the definition of a 'supply of a going concern' in subsection 38-325(2), a 'supply of a going concern' is the aggregate of all of the supplies made under an arrangement which satisfies the conditions in paragraphs 38-325(2)(a) and (b).

There will be one 'supply of a going concern' when the relevant supply/supplies necessary for the continued operation of an enterprise are made under an arrangement which satisfies paragraphs 38-325(2)(a) and (b). However, in some cases, there may be more than one 'supply of a going concern' under one arrangement where all of the things necessary to operate separate parts of a larger enterprise are supplied under the arrangement, and those separate parts of the larger enterprise are operating and capable of continuing to operate separately and independently.

17. An arrangement satisfies paragraph 38-325(2)(a) where each of the following elements is present:

· the supplier supplies to the recipient;

· all of the things that are necessary for the continued operation;

· of an enterprise.

18. Paragraph 38-325(2)(b) of the definition also requires two additional elements to be present:

· 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.

In this case, we consider that the Seller satisfies the requirements set out in subsection 38-325(2) of the GST Act. The basis for this conclusion is as follows:

Paragraph 38-325 (a)

As mentioned in paragraph 16 of GSTR 2002/5, subsection 38-325(2) of the GST Act requires the identification of an enterprise being carried on by the supplier (the identified enterprise). Under paragraph 38-325(2)(a) of the GST Act, the identified enterprise is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation.

In this case the Sellers identified enterprise is a manufacturing business.

As mentioned in paragraph 16 of GSTR 2002/5, the term supply under an arrangement includes a supply or supplies under a single contract or supplies under multiple contracts, which comprise a single arrangement. The 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 the identified enterprise. The recipient must be put in a position on the day of the supply where it can, if it so chooses, continue to operate that enterprise.

A 'thing' is necessary for the continued operation of an enterprise, if the enterprise could not be operated by the recipient in the absence of the thing. All of the things necessary must be supplied from the one supplier. This is further explained in GSTR 2002/5 which states at paragraph 72, 75 and 78 the following:

· The All of the things that are necessary for the continued operation of an enterprise

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.

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.

78. The business, or operating structure and process of an enterprise is difficult to define and will always be a matter of fact and degree in a particular context. The structure and processes used by the supplier in the operation of the relevant enterprise must be supplied by the supplier to the recipient if the recipient is to be placed in a position to continue to operate the enterprise in the future. That is, the means of operation of the relevant enterprise must be supplied.

Consistent with paragraph 75 and 78 of GSTR 2002/5, under the Agreement the Seller is providing you with the Property Lease, Plant and Equipment, Stock and other relevant assets necessary to continue to operate the identified enterprise of manufacturing. Therefore upon your acquisition of the business under the Agreement you are in a position to continue to operate the enterprise being supplied.

Consequently based on the facts that we have been presented with, we consider that the Seller satisfies paragraph 38-325(2)(a) of the GST Act.

Paragraph 38-325(b) of the GST Act

Under paragraph 38-325(2)(b) of the GST Act, the supplier must also carry on the identified enterprise until the day of the supply, whether or not as part of a larger enterprise as stated within paragraphs 29 and 30 of GSTR 2002/5. We have been advised that the administrators carried out the enterprise of the Sellers until the Completion Date.

However, just prior to the supply of the enterprise by the Seller all the Sellers' employees will be on annual leave. Therefore the issue arises as to if the absence of the employees from the Sellers premises will result in the requirements of paragraph 38-325(2)(b) not being met.

Paragraph 141 to 148 of GSTR 2002/5 explains the Commissioners views on a supplier carrying on an enterprise until the day of the supply. In particular paragraph 141 and 145 state:

· Supplier carries on the enterprise until the day of the supply

141. The 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.

145. A supplier, who temporarily ceases some activities of an enterprise for a short period, for example, for cleaning and maintenance purposes, to facilitate its supply of everything necessary for the continued operation of the enterprise under the arrangement, has not ceased to carry on the enterprise for the purposes of paragraph 38-325(2)(b).

In this case, although all the employees of the Seller were permitted to be on annual leave just prior to the supply of the identified enterprise, we do not consider that that act alone makes the enterprise cease to be carried on or continued to be carried on. Rather, as the employees are on annual leave and continue to be employed by the Seller until the day of the supply we consider that the enterprise continues to be active and there is merely a temporary absence of the employees from the premises.

Further according to the Agreement you have agreed to make an offer of employment to each of the Sellers employees before the Completion Date which is conditional on Completion of the Agreement and effective from the Completion Date. Consequently the employees commenced work with you in the identified enterprise directly after the Completion Date.

Consequently we consider that provided the administrators of the Seller carried on other activities necessary for the continued operation of the enterprise of the Seller, the Seller will satisfy 38-325(2)(b) of the GST Act.

As the Seller satisfies the requirements of section 38-325 of the GST Act the supply made under the Agreement is considered to be a GST-free supply of a going concern. Accordingly, the supply is not considered to be a taxable supply under section 9-5 of the GST Act and GST will not apply.

1(b) Can the Commissioner confirm that the acquisition of the business by you from the Seller under the Agreement is not a creditable acquisition under section 11-5 of the GST Act.

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act outlines the requirements for a creditable acquisition and states:

You make a creditable acquisition if:

· you acquire anything solely or partly for a *creditable purpose; and

· the supply of the thing to you is a *taxable supply; and

· you provide, or a liable to provide, *consideration for the supply; and

· you are *registered, or *required to be registered.

In this case, on the basis that the sale of the business by the Seller to you satisfies the requirements of a going concern, and is a GST-free supply, the supply to you is not a taxable supply. As such paragraph 11-5(b) of the GST Act will not be satisfied and you do not make a creditable acquisition.