ATO ID 2007/180: GST and 'supplies made through the enterprise' for the purposes of Division 135
Date of decision: 31 August 2007
Business line: Indirect Tax

Issue
Is the sale of the entity's enterprise itself a supply 'made through the enterprise' for the purposes of paragraphs 135-10(1)(a) and 135-10(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision
Yes. The sale of the entity's enterprise is a supply 'made through the enterprise' for the purposes of paragraphs 135-10(1)(a) and 135-10(1)(b) of the GST Act.

Facts
The entity, which is registered for GST, acquired a retirement village enterprise as a GST-free supply of a going concern under section 38-325 of the GST Act. The entity acquired the enterprise with the intention of operating it, its intended supplies being input taxed supplies of residential accommodation and taxable supplies of services. At the time of acquiring the enterprise, the entity did not intend to sell the enterprise. The entity had an increasing adjustment under section 135-5 of the GST Act. After several years of operating the enterprise, the entity sold it to another entity as a GST-free supply of a going concern under section 38-325 of the GST Act. The entity has to determine whether the sale of the enterprise itself needs to be taken into account in working out how section 135-10 of the GST Act applies.

Reasons for decision
Summary: Subsection 135-10(1) of the GST Act effectively provides that if an entity has acquired a supply of a going concern, Division 129 of the GST Act applies to that acquisition, in relation to: in the same way as that Division applies: When Division 129 of the GST Act applies because of subsection 135-10(1) of the GST Act, it involves a comparison of the intended proportion of all supplies to be made through the enterprise that are neither taxable nor GST-free with the actual proportion of such supplies. Whether the sale of the retirement village enterprise itself is a supply made through that enterprise for the purposes of section 135-10 of the GST Act requires a consideration of the meaning of the word 'through' which appears in the phrase 'supplies made through the enterprise', at the same time keeping in mind the context in which it appears. There is no definition of 'through' in the GST Act. Of the meanings given by the Macquarie Dictionary , 3rd Edition, 'by means of' is the most pertinent. Considering the dictionary meaning in isolation from the context of the provision may lead to the conclusion that the sale of the enterprise itself is not a supply made 'by means of' the enterprise, as the operation of the enterprise does not involve its sale. Rather, the enterprise involves the provision of residential accommodation and services to the residents. However, in interpreting the meaning and scope of the phrase 'supplies made through the enterprise' for the purposes of section 135-10 of the GST Act, it is necessary to consider its policy intent and the surrounding legislative context, as well as the syntax of the provision. This is the approach adopted by the Courts in interpreting the GST Act ( HP Mercantile Pty Ltd v. Commissioner of Taxation [2005] FCAFC 126: 2005 ATC 4571; (2005) 60 ATR 106, Sterling Guardian Pty Ltd v. Commissioner of Taxation [2005] FCA 1166; 2005 ATC 4796; (2005) 60 ATR 502, SAGA Holidays Limited v. Commissioner of Taxation [2006] FCAFC 191; 2006 ATC 4841; (2006) 64 ATR 602 ( SAGA Holidays )). As Young J said in SAGA Holidays : ... the legislation is expressed in broad and flexible language. These considerations, and the nature, policy and surrounding legislative context of the GST Act, indicate that the Court should construe the Act in a practical and common sense way and that, generally speaking, it should avoid interpretations which are unduly technical or overly meticulous and literal: see HP Mercantile at 564-566 [41]-[53] per Hill J; and DG Hill, Some thoughts on the principles applicable to the interpretation of the GST (2004) 6 Journal of Australian Taxation 1. Paragraph 6.255 of the Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 (EM) states: Under the general rule for supplies there will be GST included in the price for an acquisition. If the acquisition is not entirely for a creditable purpose you are not entitled to a full input tax credit for it. This means that you bear some of the cost of the GST on the acquisition in proportion to your private or input taxed use. However, if the thing you acquire is GST-free and you use it only partly for a creditable purpose there is no GST for you to bear. This applies to acquisitions of going concerns that are supplied GST-free. Further, paragraphs 6.256 to 6.258 of the EM state: Division 135 provides for an adjustment to ensure that you account for GST in proportion to the private or input taxed use of a going concern that you acquire. The adjustment increases your net amount by an amount equal to the GST you would bear on the acquisition if it had been a taxable supply to you. The adjustment is equivalent to the difference between what would have been the GST on the supply and the input tax credit you would have been entitled to for the acquisition if the supply had been a taxable supply. This is the effect of section 135-5. This means that you only get a going concern GST-free to the extent that you intend to make taxable supplies with it. If what you actually use the going concern for is different from what you intended to use it for when you acquired it, you will have an adjustment for change in creditable purpose under Division 129. It can be seen from the above statements in the EM that the underlying objective of Division 135 of the GST Act is to provide for one or more adjustments to ensure that a recipient of a GST-free supply of a going concern accounts for GST to the extent that the going concern is used for non-creditable purposes. In this context, it is appropriate to interpret the phrase 'supplies made through the enterprise' for the purposes of paragraphs 135-10(1)(a) and 135-10(1)(b) of the GST Act to include a supply that is a sale of the enterprise itself. It accords with the purpose of Division 135 of the GST Act and the policy intent of the GST Act as a whole to view the sale of the enterprise itself as a use of the going concern acquired. This view results in an appropriate amount of GST being accounted for in relation to the acquisition of the going concern that reflects the proportion of its non-creditable use. The alternative view that the sale of the enterprise itself is not a supply 'made through the enterprise' would, contrary to the policy and legislative context of the GST Act, result in an adjustment which does not reflect the total use of the enterprise acquired. This in turn could result in an underpayment or overpayment of GST depending on whether the sale of the enterprise is a taxable supply, an input taxed supply or a GST-free supply.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 38-325 Division 129 Division 135 section 135-5 section 135-10 subsection 135-10(1) paragraph 135-10(1)(a) paragraph 135-10(1)(b)
Case references: HP Mercantile Pty Ltd v. Commissioner of Taxation [2005] FCAFC 126 2005 ATC 4571 60 ATR 106
Related public rulings and determinations: GSTR 2002/5
Related ATO interpretative decisions: ATO ID 2007/72
Other references: Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 The Macquarie Dictionary, 1997, 3rd edition, The Macquarie Library Pty Ltd, New South Wales
Subject references: Goods and services tax GST free GST supply of going concern Adjustments