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Ruling

Subject: GST and acquisition of business assets

Question

Are you entitled to input tax credits on the purchase of the Assets?

Answer

Yes.

Facts

You are in the process of purchasing a manufacturing business.

You are registered for GST

You are named in the asset sale agreement as the Buyer. The Asset Sellers are members of a GST group all of whom are in liquidation. The asset sale agreement also contains the following:

· It names the Property Buyer as Entities Y and Z, as tenants in common.

· The Asset Sellers are the legal and beneficial owners of the Assets. The Asset Sellers agree to sell and you agree to buy the Assets. You acknowledge that the Asset Sellers are subject to liquidation and the Assets are being bought on an 'as is' basis

· Assets are those used in connection with the manufacturing business, including the listed assets, the business names, the domain names, the trademarks, the plant and equipment, motor vehicles and the intellectual property but exclude certain assets.

· The Asset Sellers must exercise the call option under the option agreement within a few days of the execution of the asset sale agreement.

· The option agreement is between Entity A (Land Seller) and the Asset Sellers, relating to the purchase of the Property on the terms set out in that document.

· The land sale agreement refers to the agreement for the sale of the Property by the Land Seller to the Property Buyer arising as a result of the Asset Sellers exercising the call option under the option agreement and nominating the Property Buyer as its nominee.

· The Purchase price for the Assets is listed as $X minus the "Purchase Price' (as defined in the land sale agreement) plus or minus the adjustments.

· Until completion the Asset Sellers must supply to you and to any person who has your written authority, any information or document about the manufacturing activities or the Assets in the Asset Sellers' possession of control which you or the authorised person reasonably request.

· The Asset Sellers must reasonably assist you to learn about the manufacturing activities and the Assets.

· The Asset Sellers must give or procure that the Land Seller give you and any person who has your written authority reasonable access to the premises on notice during normal business hours and allow any of those persons to observe the conduct of the manufacturing activities, examine any records and inspect the Assets and property or affairs of the Asset Sellers relating to the manufacturing activities.

· Before completion, the Asset Sellers must conduct the manufacturing activities in a normal manner.

· The land sale agreement and asset sale agreement are interdependent. A default by the Land Seller in the performance or observance of its obligations under the land sale agreement will be deemed to be a default by the Asset Sellers in the performance and observance of their obligations under the asset sale agreement. Completion of the asset sale agreement is conditional upon simultaneous settlement of the land sale agreement. The termination of the land sale agreement by the Land Seller will cause the asset sale agreement to terminate and visa versa.

· For contracts and equipment leases, from completion the Asset Sellers assign the benefit of the contracts to you and you accept the assignment and assume the obligations of the Asset Sellers under the contracts.

· The consideration for a supply made under or in connection with the asset sale agreement does not include GST. If the supply is a taxable supply then at or before any part of the consideration for the supply is payable you must pay the Asset Sellers an amount equal to the GST for the supply and the Seller must give you a tax invoice for the supply.

The call option document, between the Land Seller and the Asset Sellers, states that the Land Seller is the registered owner of the Property. The Land Seller grants the Asset Sellers the call option to enable the Asset Sellers to require the Land Seller to sell the Property to the Asset Sellers. The call option document also contains the following:

· The Land Seller has agreed to grant the Asset Sellers an option to nominate a third party buyer to purchase the Property.

· Upon the due exercise of the call option the call option fee will form part of the deposit payable under the land sale contract.

The land sale agreement provides that the present use of the Property is 'residence and factory'.

The section under tenancies is marked 'Not Applicable'. The purchase price is listed as $B. The land sale agreement also contains the following:

· On the settlement date, in exchange of the Balance Purchase Price, the Land Seller must give the Property Buyer vacant possession of the Property.

· The consideration for a supply made under or in connection with the land sale agreement does not include GST. If the supply is a taxable supply then at or before the consideration for the supply is payable Property Buyer must pay the Land Seller an amount equal to the GST for the supply and the Land Seller must give the Property Buyer a tax invoice for the supply.

· The settlement date is the date of settlement of the asset sale agreement.

The Asset Sellers are conducting the manufacturing activities from the Property.

You are not aware of any lease agreement on the Property between the Land Seller and the Asset Sellers. In addition, you are not aware of any rent payable by the Asset Sellers for the use of the Property.

The Asset Sellers are registered for GST.

Currently there is no agreement in writing stating that the sale is a GST-free supply of a going concern.

On the completion of the asset sale agreement, you and the Property Buyer will execute a lease on the Property.

You and the Property Buyer are related entities.

The Asset Sellers and the Land Seller are related entities.

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 38-325.

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).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Summary

You are entitled to claim an input tax credit on the purchase of the Assets as the supply to you, in the circumstances described, is not a GST-free supply of a going concern.

Detailed reasoning

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

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

On the information provided, you acquire the Assets for a creditable purpose as no part of the acquisition is of a private or domestic nature or relates to making input taxed supplies. You provide or are liable to provide consideration for the supply and you are registered for GST. Accordingly, the acquisition meets the requirements of paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act.

Therefore, what needs to be determined is whether the supply of the Assets to you is a taxable supply as required by paragraph 11-5(b) of the GST Act.

Whether or not a supply is a taxable supply is determined by 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. Under section 9-5 of the GST Act, the supply is a taxable supply if:

(a) the supplier makes the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that the supplier carries on

(c) the supply is connected with Australia, and

(d) the supplier 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.

Based on the information provided, the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act are met by the Asset Sellers. This is because the Asset Sellers sell the Assets for consideration, the supply is made in the course or furtherance of their enterprise, the supply is connected with Australia and the Asset Sellers are registered for GST.

The sale of the Assets is not an input taxed supply under any provision of the GST Act or any other Act. Therefore, what is left to consider is whether the supply of the Assets is GST-free.

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 Assets is a GST-free supply of a going concern, firstly, it needs to be determined whether the sale is in fact a supply of a going concern under subsection 38-325(2) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a supply of a going concern for the purposes of the GST Act. This ruling also explains when the supply of a going concern is GST-free.

Given the facts of this case, paragraph 15 of GSTR 2002/5 provides that for the purposes of the definition of supply of a going concern, it is not a supply in itself which must satisfy the conditions of paragraph 38-325(2)(a) and (b), but the arrangement under which a supply is made. There may be several supplies, each of which is a supply of a going concern under the one arrangement.

When two entities sell their enterprises to two recipients and the contracts are interdependent, each supply must be considered separately. When both supplies occur on the same day, each enterprise which is the subject of the separate supplies must be capable of continued operation by the purchasers.

The asset sale agreement provides that this document and the land sale agreement are interdependent. The completion of this document is conditional upon simultaneous settlement of the land sale agreement.

The operation of separate enterprises is outlined in each of these agreements. Hence, we need to determine if the sale as outlined in the asset sale agreement satisfies the requirements of a GST-free supply of a going concern.

GSTR 2002/5 considers the meaning of the phrase 'all of the things that are necessary for the continued operation of an enterprise'. In particular, paragraphs 73, 74 and 75 state:

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. For example, a boat may be essential to the conduct of the businesses of a professional fisherman, a water-ski instructor, a deep-sea diving instructor or a repairer of underwater structures because, in most instances, the relevant business could not be conducted at all without a boat. The supplier must supply the boat for the continued operation of the enterprise.

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 this case, the business conducted by the Asset Sellers is manufacturing. The asset sale agreement includes the transfer of assets used in the manufacturing activities. Included in the sale are the listed assets, the business names, the domain names, the trademarks, the plant and equipment, motor vehicles and the intellectual property. The sale also includes the assignment of the benefits of contracts.

The business is conducted from the Property under the Asset Sellers' arrangement with the owner, the Land Seller, who is an entity related to the Asset Sellers.

As mentioned above, one of the assets necessary for the continued operation of an enterprise would include, where appropriate, premises. Paragraphs 90 to 99 of GSTR 2002/5 discuss premises that are necessary. In particular 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 enterprise.

Paragraph 94 and 95 of GSTR 2002/5 contains an example when premises are necessary for the continued operation of an enterprise.

Furthermore, paragraph 58 of GSTR 2002/5 refers to the supply of a right to occupy premises and states:

58. Many enterprises operate from leased premises. The supplier may supply the lease either by assignment or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

In this case, as the business is the manufacture of goods, the business requires premises where the activities can be conducted. We consider that in the given circumstances, premises are one of the things that are necessary for the continued operation of the particular enterprise.

You advised that you are not aware of any lease agreement on the Property between the Land Seller and the Asset Sellers. In addition, you are not aware of any rent payable by the Asset Sellers for the use of the Property.

In this case, the Asset Sellers are occupying the Property under a tenancy at will arrangement as the Asset Sellers occupy the Property without any agreement as to the duration of the occupancy or any payment of rent.

Paragraphs 64 to 70 of GSTR 2002/5 deal with periodic tenancies and tenancies at will arrangements. Paragraph 64 states:

64. Where a supplier occupies premises pursuant to a mere tenancy at will, e.g., during a brief holding over upon expiration of a lease and pays no rent, the supplier is unable to supply those premises because a tenancy at will is not capable of assignment. If the premises occupied under a tenancy at will are a thing necessary for the continued operation of the relevant enterprise, the supplier is not able to make a supply of a going concern.

As the Asset Sellers are occupying the Property under a tenancy at will they do not have a legally enforceable right to occupy the premises and are unable to assign to you any rights in relation to the use of the Property.

The asset sale agreement provides that the Asset Sellers have exercised the call option relating to the purchase of the Property and have nominated the Property Buyer to purchase the property. The Asset and Land sale agreements are interdependent and will settle simultaneously. The sale of the Property is without any existing tenancies and vacant possession is required.

You have advised that on the date of the supply, the Property Buyer will execute a lease to you of the Property. However, the Asset Sellers have not surrendered a lease as they do not have an enforceable right to occupy the premises and they have not facilitated your entry into a lease of the premises with the Property Buyer. Rather you will be negotiating with the Property Buyer for the supply of the premises to you.

Hence, the Asset Sellers are not supplying the premises to you.

As stated in paragraph 41 of GSTR 2002/5 the ability of the purchaser to provide some of the things necessary for the continued operation of the enterprise is not a relevant factor.

As the Asset Sellers are not supplying the premises, the Asset Sellers will not be suppling to you all of the things that are necessary for the continued operation of the identified enterprise. Therefore, the sale of the Assets by the Asset Sellers to you will not meet the requirement in paragraph 38-325(2)(a) of the GST Act. Consequently, the sale of the Assets by the Asset Sellers will not be a supply of a going concern under subsection 38-325(2) of the GST Act.

Furthermore, the requirement in paragraph 38-325(1)(c) of the GST Act is also not satisfied as the Asset Sellers and you have not agreed in writing that the supply is of a going concern.

Accordingly, the sale as outlined in the asset sale agreement is not a GST-free supply of a going concern under subsection 38-325(1) of the GST Act.

On the information provided, what you will be acquiring is effectively assets only rather than an enterprise.

The sale of the Assets is not GST-free under any other provisions in the GST Act or another Act. Therefore, based on the information provided, as all the requirements of section 9-5 of the GST Act are satisfied, the supply to you is a taxable supply and the requirement of paragraph 11-5(b) of the GST Act is met.

As the acquisition meets all the requirements of section 11-5 of the GST Act, you are making a creditable acquisition. Therefore, you are entitled to an input tax credits on the purchase of the Assets.

You should note that there is no authority for the Commissioner in the administration of the GST Act to overlook the incorrect GST treatment of business to business transactions on the basis that the overall effect of the transactions is revenue neutral. To do so would conflict with the structure of the tax and undermine its integrity.