If you are selling an enterprise (for example your business) then may choose to reach an agreement with the purchaser to apply a concession contained in the GST Act to make it a GST free supply.
In order to understand what a GST free supply is it is necessary to understand in simple terms how our GST system works.
GST is payable on taxable supplies. If you make a taxable supply you are referred to as a supplier and the person to whom the supply is made is called the recipient. A supply will be a taxable supply if it “is made in the course or furtherance of an enterprise …” but will not be a taxable supply “to the extent that it is GST free …” (s 9-5 of the GST Act). Carrying on an enterprise is defined in s 195-1 of the GST Act to include “doing anything in the course of the commencement or termination of the enterprise”.
In the ordinary course of events the supplier gives the recipient a tax invoice which in circumstances where the recipient makes what is termed a creditable acquisition the recipient is entitled to set off the amount of its input tax credits attributable to a particular tax period against amounts of GST which are attributable to the same tax period. This is done in the recipient’s BAS.
In the GST system if you are registered for GST purposes then it is most likely that you will make supplies (ie you will be a supplier) and you will receive supplies (thereby making that same person a recipient).
Suppliers, recipients, supplies, taxable supplies, GST free supplies, enterprises, input tax credits, creditable acquisitions and tax invoices are words and phrases which have specific meanings under the GST Act and it is beyond the scope of this memo to explain their precise meaning.
For present purposes all that needs to be understood is that if a supply is GST free then it will not be a taxable supply which means:
- no GST is payable on the supply; and
- an entitlement to input tax credits for anything acquired to make the supply is not affected.
When is a supply of an enterprise GST free?
The GST Act (which is actually called A New Tax System (Goods and Services Tax) Act 1999 (Cth)) provides that the supply of a going concern is GST-free if:
- the supply is for consideration;
- to a recipient registered or required to be registered under the Act; and
- “the supplier and the recipient have agreed in writing that the supply is of a going concern” (s 38-325(1).
- “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).”
The basis of this concession is statutory it does not arise by operation of any other area of law.
Why claim the concession?