Edited version of your private ruling

Authorisation Number: 1012456589338

Ruling

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

Question

Is the recipient making a creditable acquisition when it acquires the suppliers' enterprise, including all the assets, rights and liabilities?

Answer

No, the recipient is not making a creditable acquisition when it acquires the suppliers' enterprise, including all the assets, rights and liabilities. The acquisition by the recipient is an acquisition of a GST-free going concern.

Relevant facts and circumstances

This ruling request has been made on behalf of numerous suppliers belonging to the same industry.

The suppliers are service providers and provide specialised services to their communities.

The suppliers are going through a restructure to sell their businesses, including all the assets, rights and liabilities, to the recipient.

The recipient will continue to provide the same services.

In return for the transfer of assets and liabilities to the recipient, the suppliers will be issued shares in the recipient's enterprise.

The suppliers will also transfer their current employees to the recipient with the same entitlements.

We have also been informed of the following:

· the suppliers carry on and will carry on, the enterprise until the day of the supply

· the recipient will be registered on the day of the supply

· the suppliers and the recipient will both agree in writing that the supply is the supply of a going concern

· the suppliers will supply to the recipient all of the things that are necessary for the continued operation of the enterprise including:

· the assets of the enterprise, premises, plant, stock, goodwill, contracts, licences etc;

· the business or operating structure and process of the enterprise, the commercial or economic activity relevant to the enterprise being carried on (e.g. current advertising); and

· essential employees of the business.

In this case, we have been asked whether the GST going concern exemption applies to the transfer of the businesses from the suppliers to the recipient, subject to documentation of the agreement by all parties.

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 subsection 9-15(1)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Subsections 38-325(1) and (2)

Reasons for decision

Creditable acquisition

Section 11-5 of the GST Act states that a creditable acquisition is one where an entity acquires anything solely or partly for a creditable purpose, the supply of the thing to the entity is a taxable supply, the entity provides, or is liable to provide consideration for the supply and is registered or required to be registered.

Under section 11-15 of the GST Act an entity acquires a thing for a creditable purpose to the extent that it makes the acquisition in carrying on its enterprise. However, it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to a supply that would be input taxed or is of a private or domestic nature.

According to the information provided the recipient will acquire the businesses from the suppliers, including all the assets, rights and liabilities of the suppliers in carrying on an enterprise. Therefore, where all of the requirements under sections 11-5 and 11-15 of the GST Act are satisfied the recipient will make a creditable acquisition.

Taxable supply

Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is for consideration, the supply is made in the course or furtherance of an enterprise that the entity carries on, the supply is connected with Australia and the entity 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.

GST-free supply

Subsection 38-325(1)

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

(a) the supply is made for *consideration;

(b) the *recipient is *registered or *required to be registered for GST, and

(c) the supplier and the recipient have agree in writing that the supply is one of a going concern.

The asterisked terms are defined in the Dictionary, starting at section 195-1 of the GST Act.

Consideration

Subsection 9-15(1) of the GST Act provides that consideration includes any payment in connection with, in response to, or for the inducement of a supply. Consideration means any consideration within the meaning given by section 9-15 of the GST Act, in connection with the supply or acquisition (section 195-1 of the GST Act).

Payments are not limited to amounts of money. A payment can be made in a non-monetary or 'in kind' form.

However there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. Accordingly, there are two elements to consideration. There must be a payment and secondly there must be a nexus between the payment and the supply.

In this case we have been informed that in return for the transfer of assets and liabilities to the recipient, the suppliers will be issued shares in the recipient's enterprise.

An issue of shares can be consideration (that is, non-monetary consideration) if the shares are issued in connection with, or in response to, a particular supply. In our view, these shares are consideration for the supply of the assets and liabilities of the suppliers. The issue of the shares by the recipient is sufficiently connected to the transfer of the assets and liabilities by the suppliers, to be consideration for the supply of those assets and liabilities.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non monetary consideration explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, it is non-monetary consideration).

Paragraph 130 of GSTR 2001/6 states that something that is non-monetary consideration can itself be a taxable supply.

Further, paragraph 3 of GSTR 2001/6 states:

130. The GST treatment of non-monetary consideration (when it is viewed as a supply itself) is not relevant to its status as consideration. Circumstances in which the GST treatment is not relevant include where non-monetary consideration is received from an entity that is not registered for GST purposes, or is a GST-free or an input taxed supply. These things, when they are consideration, have a GST inclusive market value with the GST component being nil.

In the present case there are two supplies. One is the supply of assets and liabilities of the suppliers to the recipient and the other is a supply of shares made by the recipient to the suppliers.

A supply of shares is an input taxed supply under Division 40 of the GST Act and no GST is payable on the supply.

The supply of assets and liabilities of the suppliers to the recipient would be a taxable supply where the requirements of section 9-5 of the GST Act are met. However, the issue relevant for consideration is whether the supply of the assets and liabilities of the suppliers may be a GST-free supply of a going concern under section 38-325 of the GST Act. Where the supply is GST-free, the recipient will not make a creditable acquisition.

Recipient's GST registration

The recipient will be registered on the day of the supply.

Agreed in writing

In this case we have been informed that the suppliers and the recipient will agree in writing that the supply is the supply of a going concern.

Thus all of the requirements of a GST-free supply of a going concern under subsection 38-325(1) of the GST Act will be met with respect to this transaction.

Subsection 38-325(2)

Subsection 38-325(2) of the GST Act defines the term supply of a going concern as 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 the enterprise, and

(b)   the supplier carries on, or will carry on, the enterprise until the day of supply.

Supply under an arrangement

There is no definition of the term arrangement in the GST Act. Generally, it means an arrangement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings.

For the purposes of the GST Act, it is not a supply itself that must satisfy the requirements of paragraphs 38-325(2)(a) and (b) of the GST Act, but the arrangement under which the supply is made.

Paragraphs 19 and 20 of GSTR 2002/5 state:

19. A supply is defined in section 9-10. The term 'supply under an arrangement' includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise, that is, the enterprise referred to in paragraphs 38-325(2)(a) and (b) (the 'identified enterprise').

20. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the 'supply of a going concern', in the written agreement which is required under paragraph 38-325(1)(c) or in any other written agreement that relates to the arrangement entered into on or prior to the day of the supply.. ..

In this case, we have been asked whether the GST going concern exemption applies to the transfer of the business from the suppliers to the recipient, subject to documentation of the agreement by all parties.

In our view, where an agreement satisfies subsections 38-325(1) and (2) of the GST Act; this would evidence an arrangement in accordance with subsections 38-325(1) and (2) of the GST Act.

All of the things that are necessary

For there to be a supply of a going concern it needs to be determined whether the suppliers supply to the recipient all of the things that are necessary for the continued operation of the identified enterprise under paragraph 38-325(2)(a) of the GST Act.

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 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 of GSTR 2005 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.

We were informed that the suppliers will supply to the recipient all of the things that are necessary for the continued operation of the identified enterprise including:

· the assets of the enterprise, premises, plant, stock, goodwill, contracts, licences etc;

· the business or operating structure and process of the enterprise, the commercial or economic activity relevant to the enterprise being carried on (e.g. current advertising); and

· essential employees of the business.

The issue of staff is addressed in paragraphs 122 to 129 of GSTR 2002/5. These paragraphs provide that the services of employees are necessary for the operation of many enterprises.

Furthermore, the continued employment by the recipient of essential employees of an existing workforce is consistent with the operating structure and processes of the suppliers' enterprise having been supplied to the recipient.

Therefore, we are of the view that in this case all of the things necessary for the continued operation of the identified enterprise will be supplied.

Carrying on the enterprise until the day of supply

We have also been informed that the suppliers will carry on, the enterprise until the day of the supply.

On that basis both of the requirements of subsection 38-325(2) of the GST Act are met.

Therefore, in this case all of the requirements of a GST-free supply of a going concern under subsections 38-325(1) and 38-325(2) of the GST Act are met.

Consequently, we are of the view that the recipient's acquisition will be an acquisition of a GST-free going concern. As such, the requirement that the thing supplied is a taxable supply to the recipient, for the acquisition by the recipient entity to be a creditable acquisition is not met.

Therefore, the acquisition from the suppliers will not be a creditable acquisition to the recipient.