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Ruling

Subject: Goods and services tax (GST) and going concerns

Question:

Will you be entitled to an input tax credit on your purchase of the passenger transport business?

Answer:

No.

Relevant facts and circumstances

You are registered for GST.

You will purchase a passenger transport business.

The vendor is registered for GST.

The business is based in Australia only.

The vendor's clients are essentially entities that hire or contract the services of the vendor to transport employees or customers to pre-determined destinations.

The total bid value is a certain amount.

The vendor does not operate the business under a franchise agreement.

The vendor will supply the following things to you under the business sale contract:

· the passenger transport

· a lease on the existing premises, which are used as depots and workshops, with an option to purchase the premises

· spare parts and consumables for the es

· tooling/tools/machinery used for repairs and maintenance of business

· the goodwill

· the business phone number

· the advertising material

· the contracts the vendor has with clients

· client lists

· the licences other than drivers' licences, for example, repairs licences for the motor vehicle and panel shop; omni licence

· certain plates, and

· intellectual property of the business including the trading names, software and other office systems and manuals of procedures.

Under the business sale contract, the current employees will continue working in the business after you purchase the business.

The vendor will operate the business up to the time of sale.

The vendor and you will agree in writing that the sale of the business is the supply of a going concern.

You will operate the business from the time of sale.

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 paragraph 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-15(2)

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 will not be entitled to an input tax credit on your purchase of the passenger transport business because the sale of the business to you will be a GST-free supply of a going concern.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you satisfy the requirements of section 11-5 of the GST Act, which 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 are liable to provide, *consideration for the supply; and

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

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

Acquisition for creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it

in carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire the thing for a creditable purpose to the extent

that:

· the acquisition relates to making supplies that would be *input taxed;

or

· the acquisition is of a private or domestic nature.

· You will acquire the transport business in carrying on your transport business.

· Your acquisition of the business will not relate to making supplies that would be input taxed.

· Your acquisition of the business will not be of a private or domestic nature.

Hence, you will acquire the business for a creditable purpose. Therefore, you will satisfy the requirement of paragraph 11-5(a) of the GST Act.

Acquisition of a taxable supply

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that

· you *carry on; and

· the supply is *connected with Australia; and

· 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.

The vendor in your case satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

· it will supply a transport business for consideration

· it will supply the business in the course or furtherance of this enterprise

· this supply will be connected with Australia, and

· the vendor is registered for GST.

There are no provisions in the GST Act under which the sale of the business to you will be input taxed.

Therefore, what remains to be determined is whether the sale of the business to you will be GST-free.

Going concerns

A supply of a going concern is GST-free where the requirements of subsection 38-325(1) of the GST Act are satisfied.

Subsection 38-325(1) of the GST Act states:

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.

Subsection 38-325(2) of the GST Act states:

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.

Paragraph 75 of Goods and Services Tax Ruling GSTR 2002/5 sets out the elements that are essential for the continued operation of an enterprise. It states:

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.

Paragraph 111 of GSTR 2002/5 discusses goodwill. It states:

111. So, if the 'identified enterprise' is a business, goodwill is supplied as one of the things that is necessary for the continued operation of that enterprise.

Paragraph 122 of GSTR 2002/5 deals with employees. It states:

122. The services of employees are necessary for the operation of many enterprises. Employees are not 'things' as defined in section 195-1 and therefore are not of themselves 'things that are necessary for the continued operation of an enterprise'. As a matter of law, employment contracts are personal contracts and are incapable of assignment. The supply of the services of existing employees of an enterprise is not a thing necessary for the continued operation of the enterprise.

The assets and operating structure and process essential for the continued operation of the passenger transport business are:

· the es

· the existing premises, which are used as depots and workshops

· spare parts and consumables for the es

· tooling/tools/machinery used for repairs and maintenance of es

· the goodwill

· the business phone number

· the advertising material

· the contracts the vendor has with clients

· client lists

· the employees

· the licences other than drivers' licences, for example, repairs licences for the motor vehicle and panel shop; omni licence

· certain plates, and

· the intellectual property of the business including the trading names, software and other office systems and manuals of procedures.

The vendor will not need to supply employees or the services of existing employees to you in order to satisfy the 'supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise' requirement (in accordance with paragraph 122 of GSTR 2002/5).

The vendor will not need to supply the drivers' licences of the current drivers working in the business to you in order to satisfy the requirement of paragraph 38-325(2)(a) of the GST Act, as they are personal qualifications (in accordance with paragraph 130 of GSTR 2002/5 of the GST Act).

In accordance with paragraphs 101 and 102 of GSTR 2002/5, where an entity operates a business from premises it owns and the premises are one of the things necessary for the continued operation of the enterprise; the entity sells its business and it leases out the premises to the purchaser, the vendor would be considered to be supplying to the purchaser one of the things necessary for the continued operation of the enterprise by leasing out the premises to the purchaser.

The vendor will supply the assets and operating structure and process essential for the continued operation of the passenger transport business as listed above, to you - the purchaser.

In accordance with paragraphs 101 and 102 of GSTR 2002/5, it is considered that the vendor will supply one of the things necessary for the continued operation of the business by leasing out its premises to you. It is not necessary that it transfer ownership of the premises to you.

Hence, the vendor will supply to you - the purchaser all of the things that are necessary for the continued operation of the business. Therefore, the requirement of paragraph 38-325(2)(a) of the GST Act is satisfied.

The vendor will operate the business up to the time of sale. Therefore, the requirement of paragraph 38-325(2)(b) of the GST Act is satisfied.

As all of the requirements of subsection 38-325(2) of the GST Act are satisfied, the vendor will supply a going concern to you.

The sale of the going concern will be for consideration. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is satisfied.

You - the purchaser are registered for GST. Therefore, the requirement of paragraph 38-325(1)(a) of the GST Act is satisfied.

The vendor and you - the purchaser will agree in writing that the sale of the business will be the supply of a going concern. Therefore, the requirement of paragraph

38-325(1)(a) of the GST Act is satisfied.

As all of the requirements of subsection 38-325(1) of the GST Act are satisfied, the vendor will make a GST-free supply of a going concern to you.

Therefore, the vendor will not make a taxable supply to you. Hence, you will not satisfy the requirement of paragraph 11-5(b) of the GST Act.

Consideration

You will provide consideration for the sale of the business. Hence, you will satisfy the requirement of paragraph 11-5(c) of the GST Act.

GST registration

You are registered for GST. Hence, you will satisfy the requirement of paragraph 11-5(d) of the GST Act.

Conclusion

As you do not satisfy all of the requirements of section 11-5 of the GST Act, you will not make a creditable acquisition and therefore you will not be entitled to an input tax credit on your purchase of the passenger transport business.