GST issues registers

Primary production industry partnership

17 Going concerns

17.1 Going concerns

17.1.1 - Going concern and intent

Background

An entity intends to supply its enterprise (for example, fish trawling) as a going concern to a GST registered recipient. The supplier and recipient have agreed in writing that the supply is of a going concern. However, prior to the day of supply, an asset necessary for the continued operation of the enterprise (for example, the fishing vessel), is destroyed or severely damaged.

Question 1

Can the entity proceed and treat the supply as a supply of a going concern and therefore GST-free, on the basis there was originally an intention to supply everything necessary for the continued operation of the enterprise?

For the source of the ATO view, refer to general principles in GSTR 2002/5 - Goods and services tax: when is a 'supply of a going concern' GST-free?

Answer

It will not be the supply of a going concern.

Question 2

Can the entity proceed to supply its enterprise as a going concern if it is first able to remedy the loss of the asset, for example, by (a) leasing another boat, (b) repairing the damaged boat, or (c) purchasing another boat?

For the source of the ATO view refer to general principles in GSTR 2002/5 - Goods and services tax: when is a 'supply of a going concern' GST-free?

Answer

It can be the supply of a going concern but see explanation below.

Explanation

Subsection 38-325 (2) of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) requires the identification of a particular enterprise that is being carried on by the supplier (the 'identified enterprise'). This is the enterprise for which the supplier must supply all of the things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of supply. These matters are explained in detail in which deals with the question 'when is a supply of a 'going concern' GST-free?'.

The term 'necessary' incorporates every attribute of an enterprise that is essential for the continued operation of the 'identified enterprise'. 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.

The day of supply is the date on which the recipient assumes effective control and possession of the enterprise which is carried on by the supplier.

Question 1

In the situation where an asset, necessary for the continued operation of the enterprise, is destroyed prior to the day of supply, for example, the boat of a professional fisherman, the supplier can neither supply all things necessary nor carry on the enterprise, up to the day of supply. Consequently the supplier cannot meet all of the requirements of section 38-325 of the GST Act. The supply of the remaining assets of the enterprise will be a taxable supply provided the requirements of section 9-5 are met.

Question 2

If the identified enterprise can be supplied using a similar suitable asset, the supply can be GST-free.

For example, in the situation where the vendor has leased another suitable boat the supply of the enterprise will be GST-free if it includes the assignment of the lease of the boat, as well as all the other things that are necessary and the other requirements of section 38-325 are met viz.

•

supply is for consideration

•

recipient is registered or required to be registered

•

supplier and recipient have agreed in writing that the supply is of a going concern

•

supplier carries on the enterprise until the day of supply.

Similarly, if the damaged boat was repaired to allow it to be operational before the supply of the enterprise, or if another suitable boat was purchased prior to the supply, and all the other requirements are met, the supply will be GST-free as the supply of a going concern.

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