Edited version of your written advice

Authorisation Number: 1012792212050

Ruling

Subject: GST and entitlement to input tax credits

Question 1

Are you entitled to an input tax credit in respect of the acquisition of the stock-in-trade under the circumstances described?

Answer

No.

Question 2

If the answer to question 1 is yes, will the Commissioner of Taxation (the Commissioner) exercise his discretion under subsection 29-70(1B) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to treat the stocktake sheets provided by the Vendor to you as a valid tax invoice for the purpose of claiming an input tax credit on the acquisition of the stock-in-trade?

Answer

As the answer to Question 1 is 'no', this question is not applicable.

Relevant facts and circumstances

You are an Australian entity that is registered for goods and services tax (GST).

You purchased an existing retail business from the Vendor on a specified date. The business purchase settled on a specified date.

You provided us with copies of the following documents:

• signed contract for the sale of the business (the Contract)

• settlement statement

• stocktake sheets

• letter to the Vendor's solicitor requesting a tax invoice for the supply of the stock-in-trade

• reply letter from the Vendor's solicitor

The Contract provides that the purchase price is $X. The Contract also provides that the parties agreed that stock-in-trade is in addition to the purchase price.

Under the Contract you agreed that in addition to the purchase price, on the date of completion, you would take over and purchase from the Vendor all the goods and saleable stock-in-trade in accordance with a specified method, which amongst other things, included the GST paid by the Vendor when the Vendor purchased the stock.

The 'Yes' box next to the statement 'Is this sale of a Going Concern?' on the Contract has been marked. The Contract further states that if the 'Yes' box is marked then the relevant clause in the contract that deals with the supply of a going concern applies.

The Contract provides that the sale of the business includes the goodwill, fixtures, fittings furniture, chattels and the plant and equipment, industrial and intellectual property, work-in-progress, and stock-in-trade, permits, licences, and other assets referred to in the Contract as business assets.

Under the contract you and the Vendor agreed as follows:

• You warranted that you are registered or required to be registered under the GST Act.

• The Vendor was required to carry on the retail business as a going concern until the completion.

• You and the Vendor entered into the Contract on the basis that the supply was GST-free and the purchase price was exclusive of GST.

• You agreed that if the Vendor was or would become liable for GST on the supply of the retail business or any business assets under or in connection with the Contract, you would pay to the Vendor an amount equal to the GST.

The contract provides that the balance of the purchase price together with the sum payable for the stock-in-trade as determined under the Contract was required to be paid on the date of completion in exchange for:

• the relevant instrument of lease relating to the occupation of the premises

• a transfer of the Vendor's interest in the lease

• any declarations or instruments required by the Office of State Revenue

• releases of all encumbrances or charges over the business or the business assets

• transfer of all business assets

• document needed to transfer registration of the business name to you

• any other document necessary to vest in you unencumbered title to the retail business and the business assets including the stock-in-trade

• any contract held by the Vendor relating to the retail business

• each authorisation of a government agency held by the Vendor to carry on any aspect of the retail business

• all documents and records relating to the retail business or needed for it to be carried on

• …

The Contract was subject to the lessor agreeing to grant you a further option period of X years under the terms of the current lease agreement.

You advised that the Vendor did not supply you with a tax invoice for the purchase of the stock-in-trade. You believed that the stocktake sheets provided by the Vendor prior to settlement were sufficient evidence that you paid GST on the acquisition of stock-in-trade from the Vendor until your business activity statement was prepared. As you did not hold a valid tax invoice for the stock-in-trade, a GST credit for the stock-in-trade was not included on your business activity statement (nor has it been included on any subsequent business activity statement).

Several requests for a tax invoice were made to the Vendor by you as well as your accountant and your solicitor.

The Vendor's solicitor advised you that the value of the stock-in-trade was calculated in accordance with the method specified in the Contract and that the Vendor did not charge any additional GST for the supply of the stock-in-trade.

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 11-15

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

A New Tax System (Goods and Services Tax) Act 1999 Section 29-70

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

Reasons for decision

Question 1

Summary

You are not entitled to an input tax credit in respect of the acquisition of the stock-in-trade as the acquisition does not meet all the requirements of section 11-5 of GST Act and therefore is not a creditable acquisition.

The stock-in-trade was a thing necessary for the continued operation of the retail business. The stock-in-trade was supplied to you under the Contract and as part of the arrangement for the supply of a going concern for the purposes of subsection 38-325(2) of the GST Act. The supply of the Vendor's business, which included the stock-in-trade, was a GST-free supply of a going concern under section 38-325 of the GST Act. Therefore, the supply of the business and stock-in-trade was not a taxable supply and the consideration paid for the purchase of the business including the stock-in-trade did not include any GST.

Detailed reasoning

Section 11-20 of the 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 sates:

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)

The term 'creditable purpose' is defined in section 11-15 of the GST Act, which provides that 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 supplies that would be input taxed, or the acquisition is of a private or domestic nature.

Based on the information that you have provided, you satisfy the requirements of paragraphs

11-5(a), 11-5(c) and 11-5(d) of the GST Act as follow:

• you purchased the stock-in-trade for a creditable purpose as you acquired the stock-in-trade solely for business purposes

• you provided consideration for the acquisition, and

• you were registered for GST at the time of the acquisition.

The next step is to determine whether the sale of the stock-in-trade by the Vendor to you was a taxable supply as required by paragraph 11-5(b) of the GST Act.

Taxable supply

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

In your case, the supply of the stock-in-trade by the Vendor to you meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

• the stock-in-trade was supplied for consideration

• the supply was made in the course of the Vendor's enterprise

• the supply was connected with Australia, and

• the Vendor was registered for GST at the time of the supply.

Additionally, the supply of the stock-in-trade was not an input taxed supply under any provision of the GST Act or any other Act. Therefore, what is left to determine is whether the supply of the stock-in-trade to you was a GST-free supply.

Whether the supply of the stock-in-trade to you was a GST-free supply

In this case, you and the Vendor agreed in writing that the sale of the retail business to you was a GST-free supply of a going concern. Therefore, Subdivision 38-J which is about supplies of going concerns is relevant for consideration.

Subdivision 38-J 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).

Subsection 38-325(2) of the GST Act requires that under an arrangement, the supplier supplies all things that are necessary for the continued operation of an enterprise. Therefore, we need to determine whether the stock-in-trade was supplied to you under an arrangement for a supply of a going concern as defined in subsection 38-325(2) of the GST Act and whether the stock-in-trade was one of the things that was necessary for the continued operation of the business.

Supply under an arrangement

Goods and Services Tax Ruling GSTR 2002/5 explains what is a 'supply of a going concern' for the purposes of the GST Act. Paragraphs 19 and 20 of GSTR 2002/5 explain what is a 'supply under an arrangement'. Paragraph 19 states:

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').

In your case, the Contract is evidence of the arrangement for the purposes of subsection 38-325(2) of the GST Act.

Identified enterprise

Paragraphs 38-325(2)(a) and 38-325(2)(b) of the GST Act require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise needs to be identified before we can consider whether the requirements of subsection 38-325(2) of the GST Act are met.

In this case, the identified enterprise that was carried on by the Vendor for the purposes of subsection 38-325(2) of the GST Act was the retail business.

Paragraph 38-325(2)(a) - All the things necessary for the continued operation of the enterprise

Paragraphs 72 and 73 of GSTR 2002/5 explain that the term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the identified enterprise. What is necessary for the continued operation of an enterprise will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term 'all things that are necessary' does not refer to every conceivable thing which might be used in the 'identified enterprise'. A thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the purchaser in the absence of the thing.

Further, paragraphs 74 and 75 of GSTR 2002/5 state:

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 Vendor sold to you the retail business. The Contract shows that the stock-in-trade was supplied to you together with all the other things necessary for the continued operation of that enterprise under a single contract (that is, the Contract) for the sale of the business.

We consider that the stock-in-trade is one of the things that is necessary for the continued operation of the retail business and is one of the things that is used in carrying on the enterprise until the day of the supply.

The Contract shows that the Vendor supplied to you all of the things that were necessary for the continued operation of the retail business on the day of the supply and put you in a position to carry on that enterprise, if you chose to do so.

Further, based on the information provided, the supply of the retail business, which included all the things necessary for the continued operation of that enterprise including the stock-in-trade, met all the other requirements of section 38-325 of the GST Act. Therefore the supply of the business (including the stock-in-trade) was a GST-free supply of a going concern.

As the stock-in-trade was supplied under the arrangement that was a GST-free supply of a going concern and it was a thing necessary for the continued operation of the enterprise, the supply of the stock-in-trade by the Vendor was not a taxable supply under section 9-5 of the GST Act. Therefore, the requirement of paragraph 11-5(b) of the GST Act is not met.

Consequently the acquisition of the stock-in-trade does not meet all the requirements of section 11-5 of the GST Act, the acquisition is not a creditable acquisition and therefore you are not entitled to an input tax credit under section 11-20 of the GST Act.

We disagree with your submission that the supplier has charged GST on the supply of the stock-in-trade because of the way they have calculated the value of the stock-in-trade. The fact that when calculating the value of the stock-in-trade the Vendor included an amount equal to the GST component that was included in their invoice is not a matter for consideration. This does not make the supply of the stock-in-trade a taxable supply.

A supply of an entity's business cannot qualify as a GST-free supply of a going concern if something that is necessary for the continued operation of that business is not supplied to the recipient under the arrangement referred to in subsection 38-325(2) of the GST Act. It should be noted that had the Vendor not supplied the stock-in-trade as part of the arrangement for the sale of the business as a going concern as defined in the GST Act, then neither the supply of the stock-in-trade nor the supply of the business would have qualified as a supply of a going concern for the purposes of subsection 38-325(2) of the GST Act. In that situation both supplies would have been taxable supplies.

Where the supplier does not make a taxable supply, then the price charged by the supplier for their supply does not include GST regardless of how the price is calculated. Consequently, the recipient of the supply has no entitlement to an input tax credit.

Determining the price for a supply

There is no provision in the GST Act which specifies how a supplier should determine the price for their supplies to a recipient (where a particular transaction is at arm's length). This is a pricing issue and the ATO cannot comment on pricing issues.

The basis on which a supplier can calculate the price that they charge for their goods or services is a contractual matter between the parties involved. The agreement between the parties will specify the method for calculating the price payable to the supplier. A pricing dispute should be resolved either by negotiation between the two parties or through normal commercial law processes.