Edited version of your private ruling

Authorisation Number: 1012540323019

Ruling

Subject: GST and the supply of a going concern

Question

Is the entity entitled to an input tax credit for the purchase of the rights and the transfer of associated assets under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, the entity is not entitled to an input tax credit for the purchase of the rights and the transfer of associated assets under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999.

Relevant facts and circumstances

The entity is registered for GST and the recipient is required to be registered for GST.

The entity will grant certain rights and sell associated assets to the recipient. The agreement provides the terms of payment and obligations of each party.

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 9-20.

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-5.

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

Reasons for decision

An entity is entitled to an input tax credit for any creditable acquisition that it makes under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

11-5 What is a creditable acquisition?

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.

The acquisitions being made by the entity under the arrangement will be made for a creditable purpose. The entity will provide consideration for the acquisitions and is required to be registered for GST. Therefore, the entity will be entitled to an input tax credit if the supplies made by the supplier are taxable supplies.

Section 9-5 of the GST Act provides the rules for taxable supplies and states that a supply is not a taxable supply to the extent that it is GST-free. Consequently, if the supplies being made by the supplier are GST-free, they are not taxable supplies and the entity will not be entitled to an input tax credit.

The supply of a going concern is GST-free under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if certain requirements are met:

38-325 Supply of a going concern

(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).

Subsection 38-325(2) of the GST Act provides a number of concepts that must be present for there to be a supply of a going concern including:

· the supplies are made under an arrangement; and

· there is an identified enterprise; and

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

· the supplier will carry on the enterprise until the day of the supply.

Arrangement

Goods and Services Tax Ruling GSTR 2002/5 provides the ATO view on the operation of section 38-325 of the GST Act and, at paragraph 16, states:

16. 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)….

As explained in paragraphs 19 and 20 of GSTR 2002/5, an arrangement may be made up of a number of separate but related contracts. The supplies being made by the supplier is 'an arrangement' as it relates to a single transaction.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act and includes activities done in the form of a business or in the form of an adventure or concern in the nature of trade. Although the subject of the supply forms part of the supplier's larger enterprise, what is being supplied to the entity must be an enterprise in itself.

Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of 'enterprise' in detail and, at paragraph 177 and 178 in relation to 'in the form of a business', states:

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

· a significant commercial activity;

· a purpose and intention of the taxpayer to engage in commercial activity;

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· the recurrent or regular nature of the activity;

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

· activity is systematic, organised and carried on in a businesslike manner and records are kept;

· the activities are of a reasonable size and scale;

· a business plan exists;

· commercial sales of product; and

· the entity has relevant knowledge or skill.

This is supplemented by paragraph 37 of GSTR 2002/5 which states:

37. The following elements are indicators that part of an enterprise may be carried on 'in the form of' a business:

· a degree of autonomy;

· a separate management structure;

· a system of internal user charging;

· a separate budget; and

· agreements with internal service providers or external customers.

It is accepted that the supplier carries on an enterprise in the form of a business in relation to the subject of the transaction. This is because there is a significant commercial activity, is carried on to make profit, is continuously operated, is operated in a businesslike manner, is able to operate reasonably separate to other functions of the supplier and has separate records, budget and assets.

All things necessary

Paragraph 72 of GSTR 2002/5 explains that the term 'necessary' means every core attribute of an enterprise that is essential for its continued operation. It does not mean every conceivable thing which might be used in the enterprise.

The supplier is providing all things necessary for the continued operation of an enterprise. The supplier is required to carry on the enterprise until the day of the supply.

GST-free

The supply by the supplier is GST-free under section 38-325 of the GST Act provided that it is for consideration, the recipient is registered or required to be registered for GST and both the supplier and recipient agree in writing that that the supply is of a going concern. All of these requirements are satisfied.

Therefore, the supply by the supplier is a GST-free supply of a going concern.

As the supplies being made by the supplier are a GST-free supply of a going concern, the entity is not making a creditable acquisition and is not entitled to an input tax credit for the acquisition.